One of the biggest non-surprises is that the British economy fell into recession. It is not a surprise because all government and Bank of England policies worked very hard to get us there. In point of fact, it has been obvious for some time that they have been trying to create a recession. Perhaps they figured if the economy fell into recession that any growth following it would be seen as an economic success that Prime Minister Rishi Sunak could claim as demonstrable proof that his economic policies would restore growth to the British economy?! That’s the only explanation I can find for the economic policy prescriptions supposedly to restore growth to the British economy. Somehow the wonderful contradictions in his 5 Policy Pledges of both restoring economic growth to stagnant Britain and lowering inflation using rising interest rates and supply side economic stupidity was somehow missed by all the bank economists appearing on the mainstream media supporting the Tory economic agenda.
The problem for Rishi Sunak, Jeremy Hunt (the Chancellor of the Exchequer) and, for that matter, the Bank of England is that the tactics that they used to reduce inflation were geared towards slowing down an overheating economy rather than enabling growth. The Bank of England kept raising interest rates, in August 2023, they reached 5.25% (and have remained at that level to date); this policy is designed to cool down an economy that is overheating.
There was absolutely no sign of the British economy overheating; inflation was not demand-driven by either producers or consumers when this policy was employed, in fact it is the opposite. Some of the strangest interviews on the news were with economists working for banks who kept on arguing that the economy was overheating to justify the actions of the Bank of England raising interest rates; but there was no evidence of this. There was growth coming out of the pandemic (or we’d be in even worse shape), but nothing to indicate an overheating economy. The British economy has been stagnant for quite a while. The last thing you want to do when an economy is stagnant is to raise interest rates if you actually want to create economic growth.
I’ve been writing about the incompetence of British government economic policies several times; you can find my previous discussions on the dkos, the last one on December 17th 2023; but you can find others over the years, it is a constant theme.
The Fall into Recession
If we look at the GDP data from the Office ofNational Statistics just released this week, we can see the quarterly estimates of real GDP of 2023, released this week:
A far more interesting picture emerges if you look at National Accounts, which examine GDP growth over time and also demand; these are from 2022, but the picture is clear: We can see how stagnant the British economy is since 2008. We can see the 2007-8 recession (made much worse by government economic policies) with a small recovery and then stagnation. The big fall is the pandemic, we can see the economy rising and then we can see it start to fall back into stagnation and then dip below stagnation into recession. It is small compared to the 2007-8 recession, but this is where we are at.
Let’s start with demand: this is measure of demand for produced output by consumers (Retails Sales Index) and Business Investment (for intermediate goods and services) from 2008-2024. We can see constrained demand for consumer goods for quite a while; then the pandemic and a rebound and then we can see it falling. The main element that has impacted the quarterly and monthly fall in GDP is consumer spending decreasing. So we have the 2007-8 “great recession”, the ConDem government begins in 2010 and 2015, the Tories under Cameron secure an outright majority. The Brexit referendum is 2016 and Cameron resigns when Brexit wins. Then Teresa May is elected leader of the Tories and takes over. Boris Johnson is elected in 2019 with a massive majority. Then we have the pandemic, Johnson is thrown out of power in 2022. Quite honestly, neoliberalism and supply side economics have quite a lot to answer for … imagine if they actually tried to stimulate demand to create economic growth through direct government job creation (but then they couldn’t destroy the public sector and services) and government investment … but that is far less fun than to create a stagnant economy based on ideological idiocy.
And here is GPD from 2008-2004 (it was just updated the 14th of February, 2024:
Why do rising interest rates counteract economic growth?
High interest rates impact on several things: 1) businesses borrowing for production have to pay more interest on money borrowed (this especially impacts small and medium size businesses that are dependent upon borrowing, including retail); 2) consumer borrowing costs rise; this especially impacts those that are reliant on credit cards as interest on borrowing has increased; they will cut back on spending; 3) mortgage costs rise due to the rising rate of interest; these mortgage costs (irrespective of whether or not your landlord has a mortgage) have been passed onto private renters. So, we see rising rents continuing as house prices fall.
“Housing: House prices fall while private rents continue to see record rises
Average UK house prices areestimated to have fallen 1.4% in the year to December 2023 (provisional estimate). This is up from a decrease of 2.3% in the 12 months to November 2023 (revised estimate).
Average UK house prices are estimated to have fallen 1.4% in the year to December 2023 (provisional estimate). This is up from a decrease of 2.3% in the 12 months to November 2023 (revised estimate).
Private rental prices continued to grow at a record high rate in the UK, rising by 6.2% (provisional estimate) in the year to January 2024, unchanged for the second consecutive month. This remains the highest annual percentage change since this UK data series began in January 2016.”
Given the cost-of-living crisis, if people have credit cards and they cannot pay immediately, this will cause them to cut spending. Also, if they actually have savings, and there is no indication of incomes rising, they will save money rather than spend it; while the interest rate increases were belatedly (compared to credit cost borrowing costs) passed onto consumers, you can earn interest. But this is irrelevant for those in low wage jobs and dependent on benefits as they are living paycheque to paycheque. High rates of interest also impact those getting mortgages (or renewing mortgages, or taking out a second mortgage), and buying expensive items like cars as borrowing is more expensive.
Simply looking at GDP per quarter often does not provide enough information as that doesn’t necessarily explain what factors existed over time that leads to where you are today. This problem of examining quarterly data (or for that matter, monthly data) is that it focusses on short-term data and the issues that are feeding into these results do not give an overall examination of why these occur. This focus on short-termism also obfuscates the structural problems in the economy and what actually maybe more appropriate solutions to the economic situation. This is why you get reporting from the BBC blaming the fall into recession on consumers’ spending less, children being out of school and junior doctors’ strikes – these are not the reason structurally for economic stagnation or the fall into recession. For that we need to look deeper into the economy itself
Inflation and the cost-of-living crisis
So, the Office of National Statistics (ONS) data on GDP discussing the recession talks about decreases in production of goods and services, it talks about consumer spending falling after deals from Black Friday, but doesn’t include the obvious cost of living crisis, this still exists despite inflation stabilising. Rents have continued to rise (despite housing prices falling), electricity and heating is still high as are food prices. Just because inflation has fallen, it doesn’t mean that we have returned to prices that existed before the massive increase in inflation nor has the economy recovered to pre-pandemic levels. Hell, according to the ONS, “Out of 13 consumer-facing service industries, 10 remain below their pre-coronavirus (COVID-19) pandemic levels (February 2020) in December 2023.”
We can see that consumer spending has decreased, but why has that happened? We need to look at longer term trends in wage incomes (wages and benefits),employment contracts and the nature of work (so zero hours contracts (where you don’t know the dates and times that you are going into work) which have essentially put younger workers into the reserve army of unemployed with low pay and no benefits like sick days) certainly will impact upon consumer spending.
To get an idea about wages and salaries, here is a look at the growth in real, nominal and total weekly wages in Britain. This comes from November 2023 from the ONS Employment and Labour Market series covering the period of 2003 to 2023:
Here we can see the cost-of-living crisis wrapped up around the CPI services increases,the goods prices, and the CPI excluding energy, food, alcohol and tobacco from the Office of National Statistics relating to consumer price inflation from January 2024. The only thing that is missing from this diagram is private rents which as was said above is continuing to rise.
We can see above, a graph from January 2024 from the Office of National Statistics, showing CPI inflation in the UK compared with other European countries, the US and the EU27.
We know what caused inflation in the period after the pandemic in Britain:
1) Blocked supply chains:
Broken and blocked supply chains arose due to the pandemic which meant that good production (supply) had adjusted to the demand during the pandemic and it was not that simple to increase production of good and services immediately; there is a time lag to increase production of goods, it is not just turning on a tap. Intermediate good production needs to be increased before you can increase final goods production, agricultural production is seasonal, (but production is world-wide and there were blocked supply chains and that is why prices rose so precipitously).
2) Rising prices of fossil fuels and energy (aka Inflation)
In Britain this was a three-fold problem:
a) private control over energy and fuel prices and the refusal of the government to regulate them; so, while all countries in Europe experienced rising prices of fossil fuels and energy, in countries where energy is owned by the state rather than private companies, energy and fuel prices rose far less (this graph is from 2022, but it is still useful).
Britain provided direct funds to assist consumers cover the rising prices of electricity and heating; but these were nowhere enough to ensure that consumers did not take a hit. A small additional amount was provided to disabled people whose energy costs are higher to run medical and mobility machinery, and extra laundry; again, not enough especially because many disabled people remained on Legacy Benefits (the benefits system that existed before Universal Credit (UC) was introduced as moving onto UC meant lower levels of income support. Additionally, the £20 weekly uplift to Universal Credit was not given to those remaining on Legacy benefits which left many disabled people unable to cope with the rising cost of living. There will be a government forced migration onto Universal Credit starting and there is no question it means lower incomes for disabled people who are still on Legacy benefits.
Moreover, the British government allowed the prices of electricity and energy to rise rather than regulating revenue earned initially, the amount the companies were allowed to charge the public was capped and then the money to the energy distributors was supplemented by the British government rather than not allowing price rises. In May 2022, the government finally introduced the 25% Energy Profits Levy (aka as a Windfall Tax, but the Tories refused to use that term). This was increased by Jeremy Hunt to 35% in January 2023 and it is supposed to run until 2028. The government then increased support for reinvestment (and investment) in production for the fossil fuel industry at £91.40 out of £100 invested in production in Britain (to say this was inconsistent with any stated aims towards green and sustainable energy is an understatement). Even with the wealth taxes, distributors were making massive profits following a period of lower profits and they had the gall to complain about the windfall tax.
b) Shift in demand for fuel following the pandemic: During the pandemic demand for fuel had decreased substantially as production slowed, transport (including car usage and aviation) had decreased. Once economies started moving again after there was a supply backlog.
c) The Russian invasion of the Ukraine impacted both natural gas and oil production and distributors took full advantage raising prices substantially; while production occurs across countries, the war not only impacted fossil fuel production as well as food production (this hit developing economies far harder this is due to lack of food self-sufficiency and production for export rather than domestic consumption in many cases) but impacted everywhere.
3) Rising Prices of Intermediate Goods and Workers’ Consumption Goods (aka Inflation)
There were rising prices of intermediate goods and food: some of this is due to rising transport costs due to the high price of oil which is used both in production as an intermediate good and distribution and transport of these good. Britain is not food self-sufficient; it gets a lot of food products from the EU and other countries. Global warming impacted output production in Spain and other Mediterranean countries which increased food prices and goods were prioritised to the EU. Britain had to get goods from further afar which increases costs (see transport above).
If inflation is considered as class struggle between capitalists over profits and the working class over wages; we can see that the capitalists have won this round and this is still impacting working class people tremendously.
Brexit and its impact on Britain’s economic crisis
Tempting as it is to just stick Brexit in with inflationary pressures above, the reality is that Brexit seriously impacted the British economy. There was no question that Brexit would reduce economic growth in Britain. Leaving the customs union, single market and Vat Area broke supply chains in trade of goods and services.
This impacted manufacturing (much industrial manufacturing is done across countries in Europe and Britain’s participation in manufacturing was now slower and more expensive than simply doing this in other countries in the EU). So, Britain lost access to joint European-wide manufacturing production (and for a time joint scientific research).
Britain is not food self-sufficient and imports large amounts of food from the EU; also, agricultural and fishing production are sold to Europe. So, Britain’s production of food is highly dependent on Europe and leaving the EU has meant increased costs due to paperwork, we still need to follow European rules on food export (that is why the US and Canada’s demands to accept their hormonal meats was the breakdown in agreements as that is forbidden to enter the EU). Full custom controls were introduced in 2021 by the EU; this means customs documents must be provided for all imports and exports between the EU and UK. So from the Commons Library: New Customs Rules for trade with the EU
“Customs controls ensure duties are paid on goods moving across the border, and goods comply with safety, security, health and environmental requirements.The EU introduced full customs controls from 1 January 2021.
The UK Government has been phasing in border controls for goods imports from the EU from 2021. Customs declarations are now required for all imported goods. Businesses must pre-notify imports of animals, plants, and high-risk food and feed. Certain high-risk animals and plants require health certificates and checks. The planned introduction of the remaining controls – health certification and sanitary and phytosanitary (SPS) checks on all agri-food products, physical SPS-checks on EU imports at designated Border Control Posts, and safety and security declarations – has been postponed several times, most recently in September 2023.”
The government of Britain has produced a new Border Operating Model for trade with the EU which explains the rules and processes of exporting and importing goods with the EU (a wonderfully soul-destroying document to slog through if you are not someone wanting to export goods to the EU or import them into Britain).
Neither has Britain opened up large new trade and export markets in other countries tremendously and despite being outside of the EU they are still constrained by EU laws relating to import and export of goods. So, despite the fact that the EU is Britain’s biggest trading partner, all Brexit has done is increased food costs and prices, undermined its financial and manufacturing sector and slowed down export and import of goods between the EU and UK. The right-wing fantasy of eliminating all laws between Britain and the EU (especially human rights law) has not been that easy and the Tories have realised that freeing themselves from the chains of the EU simply cannot be done.
Moreover, many financial companies were located in Britain as it has always had a strong financial sector (e.g., insurance and financial services). Leaving the EU meant that Britain no longer served as an entry into the EU, as such, insurance and other financial companies relocated to Ireland and the Netherland as the access point to the EU. This impacted on service production and contrary to the bizarre beliefs of a revival of the dominance of the British economy, it has slowed and fell into a recession.
This was not unexpected by anyone who bothered to do a basic level of investigation about the economic impact of Brexit (and you know the MSM cannot be bothered to do that) it was just ignored by the right-wing who supported Brexit; they babbled endlessly at how Britain freed from the chains of Europe would rise to its former glories. While the right-wing wished to be free of migration laws in the EU; they actually forgot that they needed European labour in Britain, hence the labour shortage hitting the NHS, care sector and tech sector and the loss of manufacturing, financial services, and pharmaceutical controls to members of the EU.
However, in 2016, there was a report from the Treasury to the Prime Minister David Cameron and Chancellor of the Exchequer George Osborne projecting that Britain would fall into recession if it left the EU with a loss of over 500,000 jobs; this was so over the top that no one took it seriously, but it makes for interesting reading. Warnings of the shock of a Brexit vote itself could cause a recession according to the Treasury. I have a memory, but it may just be a nightmare of a reporter asking Jacob Rees Mogg whether the economy would be negatively affected if we left the EU and he said it would a short blip, but everything would come back stronger. The actual situation has proven to be worse; but no one could have predicted the pandemic ... funny old world we live in …
To make it easier for Americans to understand, the British right-wing had fantasies of a Britain like Texas (free market stupidity, low taxes, limited migration, a limited social welfare state, a limited public sector and some economic growth), however, it’s reality far more resembles that of Alabama.
Mainstream Media Reporting on the Recession
The reporting on the recession was absurd; the BBC actually opened their article on the recession with the following:
“People spending less, doctors' strikes and a fall in school attendance dragged the UK into recession at the end of last year, official figures show.
The economy shrank by a larger than expected 0.3% between October and December, after it had already contracted between July and September.”
So according to the BBC, the recession is caused by consumers decreasing spending, Junior doctors’ being on strike and fewer children attending school; while this is possibly relevant if you want to look at monthly changes in GDP, that doesn’t tell you much. While these are mentioned in the ONS report on falling GDP, blaming the recession on these groups of people is absurd. As I said above, the problems of looking at short-term data means that you don’t get a general picture.
However, if they had bothered to look at the ONS Cost of Living -- Latest Insights which came out on February 14th as well, that would have been useful as it provides information about housing, that housing prices have fallen (1.4% in the year to December 2023), but private rents are still increasing:
It also provides information about high prices in food and energy and their impact on the majority of the population. Food price inflation is falling, but it is still very high and thatreduces available income to purchase non-necessary goods and services. The ONS openly states this in several data sets.
“Food: Inflation falls to lowest level since April 2022
Prices of food and non-alcoholic beverages rose by 7.0% in the year to January 2024 according to the latest Consumer Prices Index including owner occupiers’ housing costs (CPIH).
This was the tenth consecutive month of falls in food and non-alcoholic beverage inflation, down from 8.0% in December and a recent high of 19.2% in March 2023, which was the highest annual rate seen for over 45 years.”
Then there was information about energy prices and that 41% of people were still finding it very or somewhat difficult to afford them.
“The survey also revealed that 44% of adults in Great Britain are using less fuel, such as gas or electricity, in their homes because of the rising cost of living.”
This very important information could provide some insights into cutbacks in consumer spending on non-necessary purchases. But then again, if they actually did this research, they could not blame Junior Doctor’s strikes and children not going to school for the rising interest rates that have pushed the economy into a recession.
Blaming the victims
The one thing the Tories are really good at is pretending that everyone else is responsible for their economic disasters; everyone and everything is responsible for their failures except themselves and their policies. In fact, I believe that they have made an art of making ridiculous arguments blaming everyone and everything for their failures.
Alas, we have not seen the back of Liz Truss and her bizarre beliefs about a left-wing economic consensus scuppering her brilliant economic policies; this position appeared in her speech for the Institute for Government in September 2023. The fact that Liz Truss is still blaming the “left-wing” Economic consensus in an article written for the Daily Telegraph in early February 2024 for the response to her introduction of a new wave of trickle down economic policy and uncosted decreased taxation for the wealthy in the middle of a cost-of-living crisis and which crashed the British economy would be amusing except that she has a whole group of right-wing Tories still united behind her in her Popular Conservative Group; it seems that they feel they have not stolen enough from the majority and given it to the rich. They also love tax cuts, again on the dubious idea that these will be invested by the rich rather than stuck in their accounts (high interest rates, baby!!) or speculation in the housing markets or frittered away in speculation on the financial markets added to further instability in the economy.
When the Con-Dems came to power in 2010, cutting down the size of the public sector that was viewed as a threat to private sector growth (the old crowding out theory) was a fundamental part of Cameron and Osborne’s free market fantasies; we can find comments on the bloated debt and deficit ridden economy created by New Labour in Cameron’s speeches in 2008, 2009 and then in his maiden speech as Prime Minister in 2010. The same theme appears in George Osborne’s Emergency Budget speech in 2010:
“Our policy is to raise from the ruins of an economy built on debt a new, balanced economy where we save, invest and export. An economy where the state does not take almost half of all our national income, crowding out private endeavour. An economy not overly reliant on the success of one industry, financial services – important as they are – but where all industries grow. An economy where prosperity is shared among all sections of society and all parts of the country.”
According to the undynamic duo, the role of government was to facilitate the private sector to grow by cutting red-tape and regulations and shrinking the size of the public sector and the private sector supported by government policy ensuring easy investment would lead Britain to economic growth. Let’s say that it hasn’t worked that way.
Despite Cameron and Osborne arguing that we were all in it together, it was the British working class that bore the brunt of austerity; especially women and disabled people. But yes, they did put a cap on banker’s bonuses to show that they were tough on bankers too (yes, of course, that was removed initially by Kwarteng and Truss’s “mini-budget”, which was then put back on the shelf, but the cap was overturned in October 2023 by financial regulators despite Britain being in a cost-of-living crisis).
Under austerity, there was an attack on public sector wages, first freezing them and then only allowing a 1% increase per year until private sector pay surpassed that of the public sector (this only happened right before the pandemic), undermining wages and wage growth. Attacks on benefits undermined wage incomes. Zero hours contracts (which has thrown especially younger members of the working class into the reserve army of labour) and limited capital investment because wages are so low that it does not pay to introduce machinery has impacted productivity. The underfunding of our public sector undermined the NHS, social care, education, and the provision of all government services.
The latest pile of nonsense is that somehow it is the fault of workshy disabled people and women that the economy is not growing and that they must contribute to the society by working from home. If listening to their nonsense makes you feel as though you are reading the 1834 Poor Law Reform, it is because they are saying the same nonsense that was used to force the “undeserving poor” into work houses for being dissolute and work shy.
Rather than standing and criticising working-class people for insufficient productivity, they can take responsibility for driving wages so low that itmakes no sense to introduce technical change in production of goods andservices in the private sector and by refusing to invest in the public sector.#
Rather than take responsibility for their appalling economic policies of the “race to the bottom”, they have blamed economic stagnation (and now recession) on the lazy British working class, on disabled people and women who have dropped out of the labour market due to limited access to free child care and having to provide support and assistance for family members with impairments due to the appalling level of social care (and that is the fault of successive Tory governments).
Rather than provide childcare and a coherent system of social support and assistance, they want to force women into work and, of course, they will hold them responsible when this ends disastrously for children and disabled people.They also do not seem to realise that if they want disabled to work, they will need businesses to make reasonable adjustments (and why will they since wages are so low that it interferes with profit maximisation criteria), recognise disabled people need personal assistants and computers (even if they are forced to work from home). It is also rather debateable whetherthey can force people to work given that they have not gotten rid of that pesky European Human Rights law (which was incorporated in British Law) around forced labour which only allows forced prison labour (again a present to the US whose economy relies on forced prison labour) … hmmm …
taking a deep breath now ...