All the lights are turning red for the British economy. Consumer confidence is at its lowest ever level. According to the Nationwide consumer confidence index, it dropped to 61 last month, down from 93 a year ago. Low consumer confidence is a response to bad economic news, but it also bodes ill for the future. If consumers expect things to get worse, they will be inclined to hang on to their money, so creating a self-fulfilling prophecy.
Another sign of drooping confidence is the collapse in share prices. Both London and New York have been officially declared bear markets recently. FTSE shares have been falling steadily since March and, despite rallies, for the whole year past. What does this mean? Share prices reflect expected future profitability. Profits are already tanking (see Black swans and the economic crisis) and have further to fall as recession returns to Britain.
There were hopes that the collapse of the pound (which makes it very expensive to live abroad or buy imported goods) would at least have the effect of making exports cheaper and giving manufacturing a boost. That hope has been dashed. The Office of National Statistics reported a 0.5% fall in industrial production between April and May. The fall is across the board and comes after years of stagnation in industrial production and a haemorrhage of manufacturing jobs.
The public sector is taking a hammering. ‘Prudent' Gordon Brown built up massive deficits in government spending during the boom years that have now come to an end. Now he's desperate to make cuts. Deficit in boom years is not supposed to happen. During an economic upswing the government's tax take should be buoyant, allowing a surplus to build up. This should allow the government to go into deficit during lean years. Government spending should thus function as an ‘automatic stabiliser.' New Labour have managed to build up a deficit of almost £50bn (a European record) so they can't stimulate the economy as it moves into recession. In fact the recession will make the fiscal crisis worse.
Meanwhile inflation is officially at a 16 year high. Food prices, which hit the poor hardest, are going up much faster than other items. The Bank of England is committed to manipulate interest rates so as to stop inflation getting out of control. The present system is predicated on the belief that "inflation is always and everywhere a monetary phenomenon," as Milton Friedman said. According to this belief the Bank should concentrate on controlling inflation with interest rates and the ‘real economy' will look after itself. It is because of the fear of inflation that interest rates are so high. The architect of this monetarist policy was Gordon Brown. In fact this crackpot system works because interest rates and the operation of the real economy are inseparably intertwined. Raising interest rates hurts borrowers and hurts industry, so output will be lower and the economy less over-heated. It is like the way medieval doctors used bleeding to subdue a fever. The fever subsides because the body is weakened, but the cause of the fever is not dealt with.
Financial distress continues to spread. Alliance and Leicester's shares have fallen so sharply that it was easy pickings for Grupo Santander to take over. Bradford and Bingley may not be so ‘lucky'. "The buyers should be queuing up: Bradford & Bingley's value has plunged to less than £300m, a sixth of its value at the start of the year and just a tenth of what it was worth this time two years ago...Yet last year, Bradford & Bingley made more than £350m profit before tax - more, that is, than its market value last week - and it has £40bn of mortgage loans and £20bn of savings balances. Even allowing for the Armageddon that seems to be breaking out in the housing market, that must surely be worth something?" (Heather Connon Observer 13.07.08) At present the answer seems to be ‘no'.
But what about that Armageddon? As we have been pointing out for the past year, the housing market is the node at which the financial crisis is impacting on the real economy. Everyone knows now that soaring house prices for the past five years were a classic economic bubble. It is now certain that the bubble has definitively burst. It started in the States a year ago with the sub-prime mortgage scandal that pricked the bubble. That crisis led to the ‘credit crunch' - a paralysis of the financial system as the realisation spread that countless billions of paper assets were actually worthless and the financial colossus was built on feet of clay.
House prices are falling. Every survey shows a steeper fall than the last. Halifax suggested a 25% fall this year, but even that could prove too optimistic. So what? Weren't house prices ridiculously high before, making it impossible for first time buyers to get a foot on the rung of the housing ladder? Unfortunately houses are going to be less affordable, not more, as the crisis bites. One reason is because the banks have had their fingers burned, they are more cautious now. 100% mortgages are a thing of the past. The mortgage providers demand cash up front - typically a 20% deposit. In London it means a homebuyer has to stump up more than £27,000 - a whole year's wages - as the ‘Metro' pointed out.
The housing market is in meltdown. Persimmon reports a 45% drop in sales, the lowest level for 30 years. If you want to buy a house and prices are falling, then you're going to wait till you reckon they've hit rock bottom. If you've just bought a house and the price is plummeting, you can't afford to move unless you're seriously prepared to trade down. Unless you're desperate, you'll wait. If you bought your house a year ago its resale price is falling but you still have to pay a mortgage based on its asset-bubble price. So the volume of sales has collapsed. Axa estimates that houses are 30% overvalued and that, with the impending house price crash, 1.8m households will be unable to pay their mortgages or in negative equity - forking out for a home they can't afford and can't sell.
So, if they can't sell houses, why keep building them? Housebuilding has virtually come to a halt. Estimates range from only 80,000 to 120,000 completions this year (In 2007 it was almost 175,000). For instance Persimmon plans to finish 11,000 homes - down from 16,000 in 2007. Last week alone the big building firms announced 4,000 redundancies. But that is just the tip of the iceberg. The construction industry is overwhelmingly casualised. Most building workers are employed by subcontractors, not by Persimmon, Barratt, Bovis and the rest. Construction employs 2m workers and, as house building collapses, swathes of redundancies in the industry seem inevitable. And, according to Capital Economics, "the housing market correction is only in its early stages."
Building companies are feeling the pinch. Barratt shares have gone from £12 at the peak of the boom to 67p now. As a result the crisis-hit companies have to contemplate selling their land banks. But of course they bought land in the heady days of the housing bubble. They're not going to get the same price as they paid for it back then. Their alternative is to approach the bank manager to recapitalise their firms. But bank managers are wary of people approaching them with outstretched palms these days.
So the credit crunch hits the building firms and the crisis in the construction industry impacts back on the problems of the banks. It's a vicious cycle. And there's no end in sight. Commentators have begun to suggest it could drag on for years. Certainly the housing crisis could take five years or more to unravel. Unemployment has already begun to rise. Officially it is 1.65m but this is early beginnings. In June it went up by 15,000, the biggest rise for 16 years. Unemployment is described as a lagging indicator. The first reaction of bosses to bad times is not to sack skilled and experienced workers. It is to hang on in there and see how long the crisis is likely to last. But capitalism is a system based on profit, and profits are shrivelling. It is inevitable that the bosses will try to load their problems on to the backs of the working class through layoffs and cutting wages. There's a recession on its way - no doubt about it.
For ten years Gordon Brown has been mouthing the phrase "no return to boom and bust". Now we see it is meaningless. Darling in his Mansion House speech in June also brushed off the threat of recession, asserting that "our economy will continue to grow." But there has been a boom and it has turned to bust. Brown and Darling are denying what is going on in the real world before their eyes. They can't do anything about the recession since they are not prepared to act against the source of the problem, the capitalist system. More and more people will begin to see that if the only way we can control the economic system and make it work in our interests is if we own it.
- Britain: Sixty years of the National Health Service by Kate Smart and Barbara Humphries (July 7, 2008)
- Britain: Something has to give by Socialist Appeal Editorial Board (July 3, 2008)
- Britain: Black swans and the economic crisis by Michael Roberts (June 24, 2008)
- Labour's Meltdown quickens – A return to the 1970s for British Workers? by Rob Sewell (June 13, 2008)
- The Poverty of Life in Britain by Ed Doveton (June 10, 2008)