Saddam's slump but Major's crisis!
The world economy is now entering the third major recession since 1945. War in the Gulf though it has initially reduced oil prices, could yet provide the third major oil shock. Britain, as the weakest of the major capitalist economies, has been the earliest to enter a downtum. In 1990 the UK had the highest inflation, lowest growth and largest current account deficit in the EC, and 1991 commenced with the British economy deep in recession.
A record 500 businesses a week are now going bust in the UK. The economy peaked in April 1990, and industrial output has been falling ever since. GDP fell by 1.2% in the third quarter of 1990, the sharpest contraction since the early 1980s. Recession will be declared 'officially' (the standard definition is two quarters negative growth) when figures for the last quarter of 1990 are released.
Profits have undergone their sharpest quarterly decline since 1981. Many highly geared (heavily borrowed) companies are finding difficulty financing their levels of debt from a falling cash flow. The domestic economy is now begging for interest rate cuts, but the need to maintain parity within the Exchange Rate Mechanism (ERM) makes this impossible. The pound sits at the bottom of its ERM band, meaning interest rates can only be cut with a devaluation.
The December unemployment figures rose by 57,000, their steepest monthly rise since the slump of the 1979-80. Analysts expect the total will top 2 million by April, and continue to increase until well into 1992. Given the fact that these official figures are fiddled, you should add another 1 million to get the real figure. Last time round the recession took until 1984 for unemployment to peak.
The initial impact of the slump appears to be the reverse of that in 1980-81 when UK manufacturing capacity was decimated with the North, Midlands and Scotland worst hit. The 1980s were characterised by huge growth of the service sector relative to manufacturing. Page 6
FEATURES
by Dave Palmer British Aerospace workers oppose threat to jobs Services now employ three times more people than manufacturing (though the relative share of total domestic expenditure on services and manufactured goods has remained constant).
Now it is those regions in which 1980s growth was fastest - the South-East, SouthWest and East Anglia - and sectors which expanded most - financial services, construction, retailing and media - that have felt the first impact of falling demand. High interest rates and the high pound are bearing down on the competitiveness of exports, meaning that job losses are now spreading to manufacturing industry. The downtum has been most acute amongst firms producing investment goods such as computers, machine tools goods and those making hi-tech consumer goods.
The claims for Thatcherism's success in restructuring the UK economy rest upon two main indices. Productivity increased sharply relative to other major capitalist economies; this is almost certainly due job losses, raising the level of exploitation and the massive scrapping of less efficient capacity in the previous slump - 'leaner and fitter' has also meant smaller. And in 1988-89, at 19.3% company profits hit their highest level since the early 1960s - in this sense Thatcher served her class impeccably.
But Thatcher's administration also saw the re-emergence in an intensified form of the problems caused by the chronically low levels of investment in manufacturing capacity in the UK economy-
During the "boom" of 1985-89 Lawson's deregulation of the financial sector, casy mortgages and consumer credit, and tax cuts
created excess demand with which domestic output could not keep up. This provided the perfect conditions for businesses to raise prices in order to increase profits. Foreign imports filled the gap between expenditure and domestic output. The result, as soaring demand outstripped stuttering domestic supply, was rapidly rising inflation and the huge trade deficit. Large real wage rises as the economy peaked were largely the result of chronic skills shortages in key sectors. The current account deficit reached 3.75% of GDP., John Harris NUJ
forcing up interest rates to attract the 'hot money" on international capital markets required to finance the deficit.
Thatcherism has left UK manufacturing industry too anaemic for the current account deficit to be closed without years of slow growth. Unemployment which never fell below 1.6 million in the 1980s, is again being deployed as the main weapon to control inflation. The share of manufacturing in GDP is lower than in any other major industrial country. Investment in British productive capacity remained constantly weak during the 1980s. Manufacturing's share of gross fixed capital formation fell from an already low 18% in 1979 to a mere 13% by 1988.
Now the 'hard money' Bundesbank regulates monetary policy in the EC; but the UK's inflation rate is almost three times that of Germany's. To maintain the parity of the pound against the Deutschmark the Bank of England has to maintain a high interest rate which makes up the difference.
Between 1970 and 1990 sterling fell from eleven Deutschmarks to the pound to just under three. The rising differential between the productivity of the two economies was compensated for by a falling pound. The government entered the ERM at a high antiinflationary rate against the Deutschmark. ERM membership requires that labour costs -real wages adjusted for changes in efficiency - do not rise. ERM entry pressures manufacturers to cut unit labour costs to boost international competitiveness. The 'choice has become between either a fall in real wages or massive job losses. SOCIALIST OUTLOOK no 30, February 1991
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