Wednesday, July 01, 2009
The graph from the Office of National Statistics, showing Britain’s incredible shrinking economy, surely has a much bigger immediate impact on our ability to grasp what is happening than the many thousands of words pouring from journalists’ keyboards and spewing from politicians’ mouths.
What it reveals is that the recession is rapidly turning into another Great Depression. ONS figures show that the British economy shrank by a massive 4.9% in the year to the end of March 2009. According to economic historian Angus Maddison, this contraction is the biggest since 1931, the year when the Ramsay MacDonald Labour government collapsed and the prime minister formed a national coalition with the Tories.
"Clearly this is now the worst peacetime recession since the 1930s," said Michael Saunders, chief UK economist at Citigroup. "The worst contraction then was a year of around -5pc; this year will not be hugely different." The Great Depression only ended when preparations began for World War Two.
The ONS also announced that GDP (gross domestic product) in real terms in the first quarter of 2009 fell by 2.4% compared with the previous quarter. Yet only a month ago, the ONS still estimated a decline of 1.9% for the same period.
It is important to understand the reason for the revision: the rate and scale of the collapse are both so great that they overwhelm the predictive statistical techniques which the ONS use. Largely based on inferring trends from historical data, the ONS is no longer able to accurately approximate the immediate past, let alone say much about the present or the future. When more of the real concrete evidence came in, the shock of the new took most of those supposedly in the know by surprise.
Put simply, things are getting much worse and faster. Output of the production industries fell 5.1%, but construction output fell 6.9% compared with a fall of 5.0% in the previous quarter, and it is set to deteriorate further, as investment in machinery and new buildings has slumped.
And what of the future? With tax income declining and having tested the limits of its ability to issue new debt, the New Labour government is caught between denial and a charade of lies about the cuts it will have to make if it remains in power after the next election. So much so that, according to the unelected autocrat-in-waiting Lord Mandelson, it has either postponed or cancelled its comprehensive review of public spending.
The Bank for International Settlements (BIS), in its annual report is forced to acknowledge that the crisis shows that the “presumed benefits of diversification derived from the creation of financial conglomerates” were – wait for it – “an illusion”. Well, who would have thought it!
The shattering of the financial illusion resulted in a financial collapse, which in turn precipitated the economic collapse now taking place, ending another delusion – a boom based on debt-driven consumer spending. As to the notion of a swift recovery, the BIS report is sobering. It warns: “The very speed of the recent downturn could create larger than average second-round effects. In particular, if the propensity to save were to rise further in the industrial economies – as could easily happen, given the high overhang of household debt and dramatic reduction in household wealth – contractionary impulses in the global economy could be prolonged.”
Don’t say we haven’t been warned. The echoes of 1931 are resounding across the globe, reinforcing the urgency of our developing practical alternatives to capitalist slump which tackle the roots of the crisis by replacing a profit-driven economy that relies on illusions with one designed to meet the needs of people and the planet.