The economy: it's even worse than we thought

Three weeks ago we reported that GDP had contracted by 2.2% instead of the 1.9% originally reported.

Today the ONS has updated its estimate to a -2.4% drop in GDP in the first three months of 2009. The ONS also now says the recession began during the second quarter (Apr-Jun) of 2008 rather than during July to September, so that the recession has now been running for a whole year. This means GDP in March 2009 was -4.9% lower than it was in March 2008.

This is how the GDP figure for the first quarter of 2009 broke down across the different sectors:

• Construction: down 6.9%
• Service sector: down 1.6%
• Banking and finance: down 2.5%
• Manufacturing: down 5.5%

The recently published CBI Industrial Trends survey saw export orders fall sharply in June as the rest of our major trading partners continue to languish in recession too.

If it can't be fixed, scrap it!

At the end of last week, Lord Mandelson, the authentic, unelected voice of global capital within the New Labour government, stated what he saw as the “simple problem”. He was making a bid for supranational influence in Washington, in a speech entitled “Can we fix globalisation?".

He put it like this: “The stability of the global economy is the sum of sovereign national macroeconomic policies on interest rates, currency levels, domestic spending and demand. There is no mechanism to mediate between these policies or enforce action that would counter systemic risk, in financial markets or at the general level of the global economy.”

Mandelson, who is now effectively deputy prime minister after saving Gordon Brown’s skin, couldn’t have put it clearer: the whole thing is beyond control. Capital does what it has to do, regardless of what policymakers and wonks want.

Take pensions, for example. Employers now see their contributions as a major cost to be cut at a time of crisis.

Yesterday, the Organisation for Economic Cooperation and Development warned that the destruction of the value of both private and public pensions threatened to turn the two year financial crisis into a “social crisis lasting decades”. An OECD survey found that private pension plans lost 23% of their value last year, while higher unemployment “leaves little room for more generous public pensions”. At the same time, accountancy firm PricewaterhouseCoopers revealed that for the first time many firms are planning to end their final-salary pension schemes for existing staff as well as new entrants.

What, you may ask, about the total of $5,000bn (about £3,000bn or £3 trillion) already pumped into banks and pledged by governments to stimulate their own economies? Even if you discount the fact, according to Kroll, the world’s leading risk consultancy, in the rush to spend the money, more than $500 billion – at least a tenth of the total - will be lost to fraud and bribery it’s still a load of cash.

Surely all that money is doing its job, freeing the credit markets and restarting investment? Surely the upturn is on the way?

No, it isn’t.

The World Bank, another global agency with no power at all to fix the crisis, projects that the world economy will now contract 2.9%, seriously worse than its forecast of a minus 1.75% just three months ago in March.

Capital inflows to developing countries will turn sharply down, says the report, falling by a shocking 75%, leading to a 50% contraction in industrial outputs. Germany, Japan and South Korea are heavily dependent on capital intensive exports to economies like Russia, China and Hungary, so will suffer badly from the reciprocal effect of the accelerating downturn. Shares in Russia have crashed 20% this month already, and its banking system has all but ceased lending due to growing fears about a second wave of financial crisis that could hit the banking sector later this year.

Meanwhile, back in the UK, 16 weeks have passed since the Bank of England began “quantitative easing” after Alistair Darling authorised the creation of £150 billion of new money, widely trumpeted as the last throw of the financial dice. So far, £96 billion has been spent, of which £93.5 billion was used to buy “gilts”, which means it was not lent to industry for capital investment but lent to the government.

But it isn’t working. Overall, lending to private, non-financial companies fell by an average of £1 billion over each of the past six months.

It’s OK though, Alistair’s capitalist friends haven’t gone empty-handed. They’ve had £750 million in the form of corporate bonds. It’s amazing how they’ve got away with it for so long, and it’s high time they were stopped.

The simple truth is that the capitalist system cannot be “fixed” and instead would benefit from a unique scrappage project much more radical than the one introduced to try and boost car sales.

Gerry Gold
Economics editor
A World to Win
www.aworldtowin.net

Child Poverty in the UK

A report by the Office for National Statistics showed yesterday what we all know: the Government's attempts to tackle child poverty are failing.

And they're failing for a very simple reason: New Labour has failed to tackle child poverty because it has refused to address inequality and the distribution of wealth.

As a spokesperson from the ONS said: "the data suggests that the most significant influence on children's experiences growing up is likely to be income deprivation".

There's some very simple things the Government could do: raise the minimum wage, make the tax system more progressive, increase JSA and other benefits, restore trade union rights to increase bargaining power and stop undercutting through agencies.


The Morning Star rightly prioritises this story on its front page today.

According to the OECD, the "the gap between rich and poor is still greater in the UK than in three quarters of OECD countries". The OECD also reveals that "child poverty rates are still above the levels recorded in the mid-1980s".

That is shocking - children in the UK are more likely to be in poverty today than at the height of Thatcherism

Mutualisation the solution to 'out of control' banks

Leaked plans by the Tories propose to abolish the FSA and hand banking regulation to the Bank of England. Meanwhile, the Government continues to fail to intervene to control the banks that have been nationalised, and to rule out any major steps on regulation.

John McDonnell MP, LEAP Chair, said:

"The banks remain out of control, with the City ratcheting up the prospects of a return to the casino banking, sky-high bonuses, and all the associated risks to the stability of the economy.

"We cannot leave the control of our banks in the hands of a small group of speculators and a Government unwilling to act decisively.

"It is time now to develop new forms of public ownership and to bring forward proposals to mutualise the banks to develop a co-operative model of accountability."

25/06 update: Prem Sikka has an excellent article on Guardian Comment is Free on the Banking Crash and Lack of Reforms.

Banking sector greed continues

Yesterday it was announced that the new Chief Exective of the Royal Bank of Scotland, Stephen Hester, is in line for a £9.6 million pay package this year.

It's worth bearing in mind that RBS would have gone to the wall without the state bailout last year. We warned at the time that owning the banks without controlling the banks would lead to a return to the same greedy practices which caused the UK banking collapse.

Since being saved with taxpayers' money, RBS has announced over 10,000 job cuts. Our 70% stake in RBS has not saved jobs, but is now being used to pay one individual nearly 3000 times what ex-RBS staff will be receiving on the dole.

LEAP Chair, John McDonnell MP has tabled EDM 1721 'Banking Sector' calling on the Government to "intervene to control the banks in which it has a public stake and legislate to ensure the interests of bank workers and customers are prioritised by the banks rather than the bonuses, pay and dividends of executives and shareholders who caused the UK banking crisis."

The issue is well covered in today's Morning Star.

Workers take back rights at Lindsey

While Parliament has blocked previous attempts - led by John McDonnell MP - to unpick Thatcher's anti-trade union laws, workers at Lindsey and those taking solidarity action are tearing up the laws on the ground.

The right to work, and therefore the right to income, is a key economic right. Total may think it can walk all over its workforce, but the Lindsey workers and their supporters are proving where the real power lies if people act together in unity.

John McDonnell MP,LEAP Chair, said:

"We fully support the Lindsey workers who have taken strike action today and urge others to come out in support of those workers.

"We are calling on the employers to immediately come to the negotiating table to seek a just resolution of this dispute.

"The courage of the Lindsey workers has demonstrated that trade unionists are no longer willing to accept the anti-trade union laws. The Government should act now to scrap these laws which deny the basic right to strike."

There's also been excellent coverage in the Morning Star, by Professor Gregor Gall on Commment is Free, and on the A World to Win website.

Update 23/06: John McDonnell MP has tabled EDM 1718 'Lindsey Oil Refinery Industrial Action' calling on Total to negotiate with the GMB and Unite unions

And there's a new piece on Comment is Free by Gregor Gall

Darling paves the way for a return to the Casino Economy

The Chancellor Alistair Darling has ruled out tighter banking regulation - attributing the sector's collapse to a few bad apples in individual boardrooms. The Chancellor was giving his Mansion House speech to the City on Wednesday night.

John McDonnell MP, LEAP Chair, said:

"People are losing their jobs in vast numbers as a result of city speculators bringing the economy to its knees and yet Darling refuses to take decisive action to control the banking sector. He is simply setting the scene for a return of the casino economy and the bonus binge culture."

Richard Murphy, Tax Justice Network, said:

"Darling is right: we do need better people in the boardrooms of banks. More women, more trade unionists, more people who can robustly question the whole model of banking and who have the mindset to do so. Banks failed in part because of a collective myopia.

"But they also failed because investment banking was allowed to dominate retail banking. Because our basic capacity to make payment within our economy was almost destroyed by gamblers willing to stake other people's money on bets which they ensured gave them an upside and others the downside. This basic utility - the control of our money - has to be reclaimed from such people. That requires massive banking reform.

"And we have to ensure that never again can banks cut and slice debt in tax havens and sell it as good when it was anything but, with resulting cost to us all. That means bank accounts, their access to offshore, the regulatory capital dedicated to offshore banking, and the regulation of these places has to be massively reformed. Ignore any of these and the crisis will come back again, and again, and again."

Prem Sikka, Professor of Accountancy, said:

"The corporate takeover of Britain is complete. Corporate elites have unleashed economic havoc on ordinary people but have organised deeper reforms off the political agenda.

"The practices which incubated the crisis remain untouched. There are no changes to banking practices, composition of company boards, rights for depositors, mega salaries for failure, conflict of interests and light touch regulation remains the dominant philosophy. History repeats itself, first as tragedy, second as farce"

LEAP discussed the possibilities for tighter banking regulation in our May 2008 'Credit Crunch' Red Papers and again in the November 2008 Red Papers: 'The Economic Crisis'.