UK returns to growth, but what about investment?

by Michael Roberts

This week, the UK’s Office for National Statistics announced that the British economy had expanded by 0.6% in the three months May to June. All the main sectors of the economy contributed to growth – manufacturing, services and construction.  The media greeted the news with some open euphoria, but secretly tinged with caution.  And caution would be right.  These preliminary figures could easily be revised down.  And even though it appears that the UK economy has not slipped back into a technical recession (defined as two consecutive quarters of contraction), the recovery, just as in many other advanced capitalist economies since the trough of the Great Recession in mid-2009, has been pitifully poor.

Even if we take out the fall in North Sea oil and gas production, the average annual growth rate in the UK over the past four years has been just 1.3%. That compares with the credit and property fuelled annual growth of 3.3% in the decade before the financial crash and a longer-term trend growth rate of around 2.5%.   And in the productive sector of the economy, the situation remains bad.  Manufacturing output is still over 10% below its 2008 peak, whereas the services sector has nearly recovered all the ground lost in the recession.  But the overall economy is still 3.3% below its 2008 peak, some five years on.

Exports remain very weak, the budget deficit remains large (and yet to reduce this remains the main aim of this ‘austerity’ government coalition).  At best, the UK economy will grow about 1% in real terms this year.  That is half the rate of the US and much the same as the core of Europe, if better than the depression-struck economies of southern Europe. Median incomes in real terms have declined sharply in the two years to 2011-12 and are back to the levels of 2001-02. Benefits and tax credits are being cut. So real incomes will likely fall further. At best, they could stabilise at the ten-year low they have reached.

There is one overriding cause of the failure of the major capitalist economies to engineer a significant recovery in economic fortunes and thus begin to create jobs (full-time ones) and improve real incomes.  It is the lack of investment.  Government investment has been slashed everywhere as the easy sacrifice on the altar of austerity.  But investment in the capitalist sector also remains anywhere between 15-25% below the peak level in 2008 in most leading economies, including the UK (-24.8%).  And that is despite a record high mass of profits in the US and large cash hoards in the major companies across Europe.  The capitalist sector would prefer to hold cash, or buy back its shares or pay record high dividends rather that invest in new equipment, plants or employees, even though everywhere governments have slashed corporate tax rates and introduced more allowances. Why?

Well, as I have shown in previous posts, the mass of profits may have improved but the rate of profit for UK companies is well below peak.  The return on investment in risky productive capital does not match the returns to be made in driving up the share price or in buying safe and guaranteed government paper.  As long as that lasts, there will be no sustained recovery, just a crawl.