Friday, January 31, 2014

Which major economy has performed the worst since 2007?

by Michael Roberts

Who gets the prize?  It’s Italy, the ninth largest economy in the world.  Italy’s real GDP in Q3 2103 was some 9% below where it was at the end of 2007.  And the next worst is the UK, now 1.3% down (Q4 2013).  But which country’s workers have suffered the most in lost incomes and jobs since 2007?  The prize goes to the UK, the 6th largest, with a combined loss of over 7%.
The UK’s Office for National Statistics (ONS) has just published data on the impact of the Great Recession on the major capitalist economies and the degree of recovery in their economies since the end of the GR in 2009.  It is very revealing about which major economy was hit the most and which has made the best or worst recovery, along with prospects for sustainable growth to the end of this decade.

What the comparative data show is that real GDP in the UK underwent the joint-second largest contraction of the G7 economies during the 2008-09 economic downturn.  Following the global financial shock, GDP in the UK fell by 7.2% between Q1 2008 and Q2 2009; this was the joint-second largest peak-to-trough fall  among G7 economies.  This is bigger than the fall in GDP in the G7 economies on average and bigger than in the European Union.
Peak to trough
I think this confirms my forecast back in 2005 that if world capitalism went into a slump that the UK would suffer more than most because it was, more than any other, a rentier economy, i.e. its prosperity depended on its importance as a global financial centre where it could extract rent, interest and dividends out of the surplus value created by other economies.  In the global financial crash, such economies were likely to take a bigger hit that those with a more productive base.

The drop in real GDP was even greater in Japan, which is not a rentier economy like the UK.  But this was because Japan, of all the G7 top capitalist economies, is dependent on world trade, which took an almighty plunge in 2009.  That other major trading economy, Germany, also dropped sharply, but by not as much as the UK.  And the US, with a relatively small trade component in its GDP and not quite so dependent on its financial services sector, fell less, even though the world financial crash began there.

In the recovery period, the UK’s growth in the period following the recession has been slower than in other major economies.  Average growth in the UK has also been slightly lower than that of the OECD total.  Only Italy has been worse. Indeed, Italy has just stagnated at the level it reached in the trough of the GR.  It is clearly the weakest of the top ten capitalist economies in the world.  For more on Italy, see my post,
Peak to now
In most G7 economies – apart from Italy and France – the employment rate was around 70% of the workforce prior to the 2008-09 economic downturn.  The UK’s employment rate was one of the highest among G7 economies, standing at 71.8% in Q4 2007.  It then fell to 69.4% by Q4 2011, but has since increased to 70.6% in Q2 2013.  This pattern of a fall in the employment rate by Q4 2009, followed by a gradual increase, is common to Canada, France, Japan and the US among the G7.
The largest employment rate percentage point fall in the G7 between Q4 2007 and Q4 2009 was experienced by the US (5 points), followed by Canada (2.4 points) and the UK (2.2 points).  Germany actually experienced a rise in its employment rate between 2007 and 2009, and its rate of 73.3% in Q2 2013 was the highest in the G7.  The US in contrast has suffered a fall of more than 4 points over the period since 2007. Employment rates have increased since 2009 in all G7 economies apart from Italy. Of the five G7 economies with employment rates of around 70% pre-downturn, the US is the only one whose rate remains below 70%.

Most striking is what has happened to average real wages since the beginning of the crisis at end-2007.  In the UK, real wages have fallen by a cumulative 6.1% – the biggest fall in the G7.  At the same time, real wage growth was mainly positive for Canada (4%), France (2.8%) and Germany (3.1%).
If we combine the change in employment with the change in real wages, it reveals just where the pain for working people has been felt.
On this measure, British workers have suffered the most in the last five years, with a cumulative fall of 7.3% points, mainly from a decline in wages, but also from a fall in employment.  This contrasts with the US, where the cumulative fall of 4.5% has been almost totally due to a fall in employment and hardly any change in real wages.  It seems, as has been documented before, that American capitalists have tried to reduce costs in the GR by sacking employees, while the British companies have kept their workforce on but stopped any wage increases.  Also, the rate of inflation in the UK has been much higher than elsewhere.  Workers have got some nominal wage rises, but price increases have more than eaten into that.  In the case of Germany, both employment and real wages have risen since 2007 – for the reasons for that, see my post,

The UK’s Institute of Fiscal Studies has provided yet more confirmation of the hit to average incomes in the UK.   The Institute for Fiscal Studies (IFS) calculates that a mid-range household’s income between 2013 and 2014 was 6% below its pre-crisis peak. This was felt equally across high and low income groups when the cost of living was taken into account. But those on low incomes could feel the squeeze more in the coming years. This was the result of future cuts to benefits and tax credits, the IFS said.

Rising food and energy prices, which formed a bigger proportion of the spending of poorer households, had risen faster than the average cost of living measured by inflation.  The IFS said that inflation between 2008 and 2013 was 20%, while energy prices rose by 60% and food prices were up by 30% over the same period. “Looking forward, there is little reason to expect a strong recovery in living standards over the next few years….Given this, it seems highly unlikely that living standards will recover their pre-crisis levels by 2015 to 2016.”

this chart was left in for formatting.  Go to the original to see it

The capitalist mode of production is for profit.  Getting profitability back up in a major slump requires cutting costs (laying off labour, reducing wages and stopping new investment).  American capitalists have resorted to straight reductions in the labour force rather than the backdoor trick of reducing real wages, as in the UK.  Either way, working people pay for correcting the failure of capitalist production. The ‘British solution’, however, will also delay the recovery and the push its capitalist sector into a lower medium-term growth rate.  That’s because the growth in productivity (output per employee) will stop if the labour force is not sacked and there is no new investment in technology to raise output per person
The ONS data reveal that the UK has displayed a sharp break from its pre-crisis trend, with a significant fall in productivity during 2008 and 2009, and little subsequent recovery.  UK productivity increased on average by 2.2% annually between 2000 and 2007, but fell at an annual average rate of 0.6% from 2008 onwards.  This does not bode well for future long-term growth and employment in the UK.
In contrast, the US has largely maintained its strong productivity growth performance throughout the financial crisis and its aftermath – as a result of laying off workers and making the remainder work harder.  In the US, productivity grew by 1.9% between 2007 and 2009, whereas it fell by between 2.0% and 5.3% in the remaining G7 countries, and by 5.0% in the UK.  Apart from Italy, the UK has experienced the weakest recovery in productivity between 2009 and 2012.

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