Latest UK GDP growth figures at 0.1% – 50/50 chance we will enter a recession this year.
We’re witnessing a car crash in slow motion, since the coalition government of 2010, many strongly argued that a low-investment austerity approach to fixing the economy would cause a second recession. In 2012 the UK nearly experienced that double-dip recession. However, strong global economic winds have dragged the UK along with meagre GDP growth, as the rest of the World booms. The US & Germany are leading the way in the global economic boom, with the US growing a further 0.6% so far in 2018, compared to the UK’s dismal 0.1% growth.
UK growth has been so poor in recent years that growth has fallen behind countries such as Japan & Italy who are plagued with chronic economic problems.
Handling an economy post-economic crash is difficult, the government of the day may feel their hands are tied, particularly if they’re ideologically reliant on the free-market to invest in the UK. Conservative commentators often applaud the snail pace growth of the UK, claiming we can’t expect the UK to be recovering so quickly, after such a large economic crash (almost a decade later?), we should be lucky that the economy grows at all. However, Matt Whittaker from the Resolution Foundation addresses this in one simple tweet. ‘Today’s GDP revision means UK output per person is just 3% above its pre-crisis level… following the 1980 recession, GDP per capita was up nearly 27%… 1990 recession it was up nearly 20%.’.
But how did we get here? What is behind the poor economic growth?
In short, failure to invest into a high-wage, high-tech economy. From the sound of the starting gun post-2008 crash, the UK should have been investing in; infrastructure, technology, and key strategic industries.
Instead this government has let strategically important industries such as the steel industry be destroyed, by voting to allow Chinese-government subsidised steel goods (often sold at a loss), flood our steel markets. High paid, valuable jobs – gone.
They failed to capitalise on the discovery of emerging high-tech markets such as the discovery of graphene, found here in the UK, but now creating tens of thousands of well paid jobs abroad. The Conservatives have had no sound industrial plan in place to rebalance our economy away from the financial sector, and to revive manufacturing and construction sectors that can provide secure well-paid work for much of the population. Evidenced on the back of a shrinking construction industry (-3.3%, housing crisis anyone?), and sluggish manufacturing growth (+0.2%), with the economy propped up by the service sector that continues to grow.
The growing service sector has been keeping the UK economy head above water. The government has relied on a low-wage jobs boom and a surge in zero hours jobs to power UK GDP growth. Unemployment has dropped to record lows under this government, with over 3 million new jobs created. To quote the Chancellor Phillip Hammond, “Where are all these unemployed people.”
On the face of this statistic, one may conclude the government has done a fantastic job with the economy. With record levels of unemployment, the economy should be growing at a fast pace, and wages increasing healthily above inflation, as employers struggle to compete for skilled employees. That’s economics 101.
As we know, UK GDP growth is very sluggish, despite almost everyone being in work. It is also the case that UK real-term wages (accounting for inflation), has experienced the biggest decline since records began. Whilst developed European nations such as Germany and France have experienced double-digit positive wage growth, +13.9% & +10.5% respectively. On the other end of the scale, Greece and the UK have seen their wages plummet by -10.4%.
Economics 101 isn’t at play here, either the rules have changed, or we’re being presented a smokescreen by this government.
The smoke screen comes in the form of the government’s definition for employment, whilst they follow the European guidelines, they are also left open for interpretation country-to-country. To be defined as not-unemployed in the UK, you must perform a minimum of 1 hour paid work a week, or unpaid work for a family business. Furthermore, those who have been put on training schemes by the DWP (anyone receiving JSA for longer than 6 months), are no longer classed as unemployed. People sanctioned from benefit claims are also no longer classed as unemployed. When the idea of being not ‘unemployed’, but also not in employment, allows the unemployment figures to be massaged, statistics can be presented to look better than they really are. Jim Edwards explores this topic further for the Business Insider UK (link), where a breakdown of ONS figures suggests that the true rate of unemployment could be three times higher than the headline figures. That is not to say the government hasn’t created a high level of employment since the crash, as you would expect, during an economic recovery employment levels are restored overtime.
When considering the weak GDP growth, and disastrous wage decline in the UK you must question the quality of jobs created. The number of zero-hours contracts in use across the UK has risen by 100,000 from 2016, to a total of 1.8 million people. That is a huge number of people without financial security. It’s worthy to note that ‘zero-hours’ scandals in the media have prompted the retail industry to move away from them, instead attaching a low number of hours to the contract. The real number of people with precarious working hours is much higher.
Job security is key.
The security of the new jobs created, particularly in retail, are very low. In 2018 alone, more than 21,000 retail jobs have been cut or put at risk as retail & restaurant giants such as; Toys R Us, Maplin, Bargin Booze, Prezzo, Bryon, Jamie’s Italian, are either closing shop or drastically cutting staff numbers to restructure their business model (link). A focus by this government on boosting employment figures through low-paid insecure service sector work has backfired as online services such as Amazon are disrupting the market and challenging the idea of the traditional high street. Without the expensive store costs, online retailers are outcompeting traditional stores. Consumer confidence and spending has also been on the decline, with inflation hitting consumers spending power, and lower in-store spending holding back wage growth… hitting consumer spending… holding back wage growth, and the spiral to recession continues.
Low wages, insecure work, and higher living costs have seen the levels of private debt held by households increase towards dangerous levels not seen since 2010. The OBR predicts the levels of household debt will reach pre-crash levels by 2021, at the current pace. This comes as no surprise as the number of households unable to afford the basics on a full-time wage has increased. The usage of food banks across the UK demonstrates just how unaffordable life has become for many working households. In 2008/09 25,899 parcels were handed out by food banks according to the Trussell Trust, that number has risen to 1,109,309 in 2015/16, with a further 16% increase so far this year. Unable to afford the essentials, increasing numbers of household are forced to turn to credit, which many are unable to repay due to high interest rates.
The wider picture fits together, the UK is about to be hit by a perfect storm of negative economic conditions.
Low wages. Low job security. Increasing living costs. Lower spending into the economy. Unaffordable private debt. Recession by 2020.