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Economic slack water

The Severn Estuary is about an hour’s bicycle ride from where I live.  It has the second largest tidal range in the world – around a 50 feet difference between a high and low spring tide.  But here’s the thing, the tide does not recede the moment the high tide mark is reached.  Rather, there is a period of “slack water” of around an hour, during which the sea can be observed to display signs of both a rising and an ebb tide.  It is only when the forces which hold the tide up – mainly the gravitational pull of the moon – lose their grip that the water begins to rush back toward the Bristol Channel and the Atlantic beyond.

It is a useful analogy for the state of the British economy today… a day when unemployment is officially at a record low, even as the Bank of England is warning that the UK’s financial stability is at risk.  Meanwhile, the British government says it is sticking to its “growth plan” despite not understanding what growth is, still less how to conjure it into existence.  There are – officially – still more vacancies than there are spare workers to fill them.  And nominal pay continues to rise – although the cost-of-living is rising faster.  In short, the expansionary forces which produced a kind of recovery after two years of lockdown are intertwined with the contracting forces of a new recession.  And this tells us that the economic tide is about to ebb.

Those who see the economy as a financial system will likely regard what the British government is attempting as broadly correct, even if they argue against the specifics – e.g., cutting taxes for the rich rather than increasing incomes for those at the bottom who have a greater propensity to spend.  In short, recession is seen to be the result of insufficient currency circulating in the economy – a state that Bank of England interest rate rises are designed to produce.  It follows that getting more currency into the economy is the key to generating new growth.  The Tory argument is that currency cannot be distributed to the masses, as this would be inflationary.  And so, it must be distributed to wealthy entrepreneurs – who just happen to be donors to the Tory party and personal friends of the Chancellor – who will supposedly invest the additional currency in productive activities which will generate growth… in reality though, they will just inflate more asset bubbles.

This is no more than was happening in the decade between the Crash and the Covid, when a combination of quantitative easing and zero percent interest rates were funnelled to the already wealthy in order to drive up the price of non-productive assets.  The trouble is that the inflationary genie is out of the bottle and there is no way of putting it back.  In response to the lockdowns, the currency printing which had previously only inflated asset prices was allowed to pour into the real economy, where it crashed into broken supply chains, sending the price of everything upward.  Worse still, global energy supplies, which have been in decline since 2018, have proved unable to expand sufficiently… again, sending prices spiralling upward.

The biggest act of folly though, was the British government’s decision to confiscate the UK-based property of Russian oligarchs earlier this year.  While the establishment media celebrated this as somehow “sticking it to Putin,” in an economy which depends upon foreign investment to maintain living standards, it is tantamount to economic suicide.  It is not just Russians that have disinvested from Britain since then.  Wealthy nationals of a whole host of non-western states who now understand that they might be next, have been selling up and heading elsewhere.

One consequence of this sudden outflow of wealth is that the British pound is no longer worth anything like its artificially inflated market price – only Bank of England currency creation to monetise government debt, together with economy-crushing rises in interest rates are propping the pound up against other currencies.  And this is surely only a stopgap.  Because – as happened in the autumn of 1992 – once investors call the government’s bluff, the pound will sink to a level which more closely reflects the real – as opposed to City of London – value of the British economy.

For the moment though, we are in economic slack water.  Backward-looking official data still looks reasonably good.  Employment is up and unemployment down.  There are still more vacancies than there are people to fill them, even if the number of vacancies is falling.  Wages are still increasing, although at a slower pace than at the beginning of the year.  Redundancies have risen slightly, but are well below the rates recorded during lockdown.  The trouble is that this picture is of the UK economy back in the summer.  They tell us nothing of what has happened since… although the recent bond sale failures suggest that the tide has turned and that we can expect a string of negative data from here on.

Even within the latest official data though, there are worrying trends:

“In July to September 2022, the estimated number of vacancies fell by 46,000 on the quarter to 1,246,000, this is the largest fall on the quarter since June to August 2020. Despite three consecutive quarterly falls, the number of vacancies remain at historically high levels.”

The problem here is twofold.  First, the kind of vacancies which are unfilled are those in the most precarious, low-paid sectors of the economy… mostly the kind of work that students used to do to supplement their income.  More importantly though, they are located in expensive areas of the UK, far away from those ex-industrial, rundown seaside, and smalltown regions where the small percentage of unemployed people live.  And there is no real incentive to move when the pay is already so low – and likely to go lower – and the cost-of-living so high:

“In real terms (adjusted for inflation) over the year, total pay fell by 2.4% and regular pay fell by 2.9%. This is slightly smaller than the record fall in real regular pay we saw April to June 2022 (3.0%), but still remains among the largest falls in growth since comparable records began in 2001.”

If wages were increasing, some, at least, of the unemployed – particularly the young – might be persuaded to up sticks and move to where the work is.  But with storm clouds gathering and real pay falling, now is a time to metaphorically and literally hunker down for the winter:

“People are stocking up on blankets and air fryers as they try to keep their energy bills down this winter, according to a new report.

“Other energy-efficient appliances, such as air dryers, and warm clothing have also been selling well…

“The report, from the BRC and consultancy KPMG, showed the value of retail sales grew by 2.2% last month, an increase from the 1% growth seen in August.  However, the slight rise in [the value of] sales masks a much bigger fall in the volume of goods sold, once inflation is accounted for.”

Not only are Britons buying less stuff, but the things we are buying are designed to alleviate what is expected to be the most difficult winter since the early 1970s.  Indeed, firewood shortages, new “value” products appearing on supermarket shelves and the widespread abandonment of pets all point to an economy which is going into hibernation rather than one poised for a new round of growth.

Meanwhile, economic inactivity – people not in work and not seeking work – mostly older people with long-term illnesses who have taken their pensions early, has continued to increase even as the number of hours worked (a sure sign of a slowing economy) has continued to fall, and is now down 6.3 million per week compared to the pre-pandemic level… another slack water indicator since, following a period of labour shortages, businesses are going to cut hours rather than lay people off.  However, given the real economy changes in household behaviour and purchasing, and given that loans and investment are drying up, even before the expected winter energy crisis hits, it is only a matter of time before the economic tide goes out.

As you made it to the end…

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