Far from heralding a new promise for the British economy, the 1% growth figure announced a month ago has already been buried by a pile of bad news. Few economists are looking towards 2013 with any real hope. Socialist Appeal editor Rob Sewell explains why.
The Economist has just marked France down as the “sick man of Europe.” However, British capitalism, another invalid of the crisis, is in intensive care and things have now just got a whole lot worse.
The British economy has been hit by a plague of zombies - businesses, households and banks – who are neither alive nor dead, according to the Bank of England.
“More and more companies are catching the zombie disease,” says Lee Manning, president of R3 (Association of Business Recovery Professionals). “It is symptomatic of a stagnant economy, with a combination of low interest rates, low liquidation rates and many businesses running at a loss.”
“Zombie companies cannot invest or innovate, they just sit there slowly losing employees and customers and dragging on the economy,” adds Mubashir Mukadam, head of the European special situations at KKR Asset Management.
These creatures of the walking dead are apparently the shape of things to come. Economists now believe that ultra-low interest rates have artificially kept these zombies alive and prevented the stock of debt falling to levels that would encourage recovery. With official interest rates at 0.5%, banks have been able to allow indebted households and companies to limp along without going under.
Zombies have also been blamed for holding back the non-existent recovery. Roughly three out of ten companies in the UK are now making a loss: 30% more than during the recession of the early 1990s but the number of bankruptcies is far lower than earlier. The Bank of England estimates that some 16,800 companies will have folded this year, while almost 25,000 went bust during the early 1990s. This low rate of mortgage repossessions and corporate liquidations in this downturn has become a worry for economists. They fear that productivity – the output of each worker – has stagnated as a result and is a drag on profitability. In other words, the slump did not get rid of sufficient excess capacity or over-production. According to a recent Financial Times, “insiders fear that the recession did not generate sufficient destruction to enable the creation of more productive companies for an upswing.” (FT, 14 November)
What a condemnation of capitalism! The reason why there is no recovery is blamed on the failure of the slump to adequately destroy unwanted (zombie) factories and industry and create even greater mass unemployment. This is the madness of capitalism. To make businesses more profitable they need to eliminate the less productive (i.e. less profitable) sectors of the economy.
This “failure” to destroy less profitable parts of the economy, according to bourgeois economists, means that Britain is following the path of stagnation suffered by Japan in the post-bubble era since 1990. They fear that in five years’ time we will awake from this current nightmare facing weak growth, high debts and huge economic problems.
The fact that capitalism needs to periodically purge itself by a process they bizarrely call “creative destruction”, that is closing factories and throwing millions out of work, shows that the capitalist system has out-lived itself. No amount of economic bandages will disguise this fact.
The British economy “grew” by 1% during the summer, but this was aided by the Olympics, a one-off event. This has temporarily taken us out of a double-dip recession but the Bank of England says we are likely to return to recession in the fourth quarter of this year.
The Bank of England has now come out with its gloomiest assessment so far. Mervyn King, the governor, warned that the economy “may be in for a period of persistently low growth.” The economy is unlikely to return to its pre-crisis levels until late 2015 and banks are not lending because of debt problems and their credit is locked in “unproductive” companies.
“We face the rather unappealing combination of a subdued recovery, with inflation remaining above target”, stated King. In fact, inflation has been above its 2% target for 69 of the past 78 months. King added further, “growth is more likely to be below than above its historical average rate over the entire forecast period.”
He continued that the lost output of recent years could only be made up “if you take a very long-term perspective of DECADES”! (Our emphasis)
Such is the sober estimate of big business, which, given its previous forecasts, is still likely to be over-optimistic. Originally, the Bank’s forecast was a robust recovery but that has now been excluded given the economy’s dire performance. “Eventually more losses will have to be realized for the economy to grow substantially again”, states the hard-nosed Financial Times. “This means girding the system for another wave of losses.” (FT, 15 November).
This is all they can offer. Bank of England officials admit that the prospect of mass repossessions, corporate liquidations and surging unemployment is not very appetizing. But however unappealing, what else can they do? This is the logic of capitalism in its zombie state.
Things are not getting better as formerly suggested. Surveys point to worsening business conditions, with inflation jumping up from 2.2% to 2.7% in October. There is no chance of exports growing as markets are shrinking in Europe and elsewhere. Sterling has risen 8% in value against other currencies over the past year, making exports even less competitive than before.
Spending on the high street dropped sharply last month by 0.8%, taking sales to their lowest level since May. Sales fell 0.6% between September and October in supermarkets and other food shops and 2.3% at clothing and shoe shops. Department stores also suffered, with sales down 0.7%. While internet sales continue to rise, they are at a slower pace.
Charlie Bean, Deputy Governor at the Bank of England, says, “It is striking that the sharpest falls in consumption were seen among high income, highly indebted households.” Vicky Redwood, an economist at Capital Economist, says she thought Britain was in the middle of a “lost decade” for consumer spending, which she believes will not return to the 2007 peak until 2016 or 2017.
As government expenditure continues to fall, spending on infrastructure, despite desperate announcements by ministers, is also tumbling. Recent figures show that infrastructure spending across the UK had declined 11.3% in the past 12 months. While the government had hoped that pension funds would invest £20bn over the next decade, and £2bn by early 2013, a year of talks has so far raised a mere £700m.
British capitalism is not investing, despite having £700bn in reserves. Indeed £750bn is sloshing around in liquid assets in company vaults and with £375bn in the bank vaults from QE, it makes that total figure most likely more than £1trn. Why invest when there is no market? Why invest when there is no demand? Why invest when there is over-capacity? And yet without investment, there can be no real recovery.
All these figures add up to a deepening crisis for British capitalism. The ruling class is floundering and the government is hell-bent on austerity, making the situation even worse. Vampire-like, the cuts are draining the very life--blood out of the economy. But, caught between a rock and a hard place, they have no other solution on a capitalist basis.
Zombie capitalism is a product of its twilight existence. The system has reached its limits as the contradictions continue to pile up. It can only offer a nightmare for working class people. It must be done away with.
Rather that attempting to patch up a diseased capitalism, which will not work in any case, the Labour and trade union leaders should be offering a real alternative. The only alternative to this discredited market economy is a socialist planned economy, not run for millionaires’ profits, but democratically owned and run in the interests of the overwhelming majority, and based upon the real needs of society. That means taking over the banks, insurance giants and the big monopolies that control the British economy, and running them under democratic workers’ control and management. Only then can we guarantee everyone a decent job, decent wages, a decent roof over their head, as well as a real future for their children.