[page 17]
Economic Focus
Why the interest?
HE TORY GOVERNMENT
has been blowing its trum-
pet about the British
economy recently. Growth is
now at the fastest rate for six
years and production stands
3.8%, higher than last year.
Tory strategists are hoping for a
'feel good factor involving tax
cuts and an unemployment drop
to help them at the next gen-
eral election. To see the real
situation, however, requires a
look beneath the surface of
these figures at the deeper na-
tional and international factors
at work.
In the years 1988 to 1990
Britain had a relatively healthy
growth rate. This was partly
based on a jump in real invest-
ment in manufacturing industry.
What is the situation today?
Since 1989 total UK invest-
ment has fallen by a third: the lowest as a proportion of production (Gross Domestic Product) for 30 years. An element in this low investment is the 'short termism' of the British ruling class. (See MIR No.57 for more detail). Most UK companies insist on 'payback' of investment within two to three years, making long-term investment plans very difficult. But companies are also reluctant to spend because they are often still repaying debts built up in the 1980s.
The upturn experienced after 1983 was led by credit. Debts were racked up by companies, consumers and government in the belief that the upturn was long-lived and debt could be paid off later. Those debts are weighing on the mind of con-
sumers. British people are cur-
rently reducing spending and
saving. Poverty is growing. De-
spite the myth that Britain is
reaching boom time, real per-
sonal disposable income fell by
1.8% between the first and sec-
ond quarter of 1994.
There is no prospect of mas-
sive government-led spending.
Attacks on the public sector,
welfare state and public spend-
ing in general is the strict
policy of government in Britain
and, in the main, internation-
ally. The present ratio of gross
accumulated public debt to pro-
duction (GDP) in the advanced
capitalist countries (OECD) is
70% and climbing. There is lit-
tle sign therefore at the
moment of any consumer-led
boom. Investment levels show
that employers are not planning
a massive increase in produc-
tion.
Underlying
processes show
the akness of
Britain's
recovery.
This brings us to the question of interest rates. If British bosses were expecting a longterm healthy growth of the economy, interest rates would typically be low. At the beginning of an upturn borrowing from the banks is at a low ebb because of the preceding collapse of industry and employment. Financiers keep interest rates low to encourage companies and people to borrow. They expect to recoup the
By
money at a later stage with in-
terest. If interest rates rise,
however, it is a sign that the
world's financiers are worried
about the future. They don't
wish to lend money to dodgy
companies that may go bust.
Government and bosses also
promote interest rate rises to
squeeze out inflation. By mak-
ing money more expensive to
borrow they hope to reduce the
amount of money available to
people and therefore keep infla-
tion in check. Inflation is a sign
of economic difficulty for capital-
ism. With strong growth in
investment and production infla-
tion should be kept down. If the
British economy looks such a
picture of health, why did inter-
est rates go up half-a-per cent
in September to 5.75%? Former
Chancellor Lamont has pre-
dicted interest rates as high as
It is clear that even at this early stage of economic recovery inflation will develop. The retail price index rose 0.5% between July and August. This news prompted a sharp drop on the British stock market. Underlying processes show the weakness of Britain's recovery. There is little to 'feel good' about.
Britain is not the only economy suffering from rising interest rates. World finance markets took a tumble in September when the USA's trade figures were published. The difference between imports and exports showed a deficit of $11bn in July - the second-worst ever. As recovery takes place imports are being sucked into the US economy. Again inflationary fears are driving up interest rates in the USA.
The world trend is for interest rates to rise. This will in
Pete
Watson
16 Economic Focus
[page 18]
turn have an effect on the eco-
nomic recovery. Companies will
be reluctant to borrow to ex-
pand production because of the
increased cost of loans.
The world economy cannot
find immediate hope in Ger-
many and Japan, the two giants
next to the US. It was Japanese
growth that contributed to the length of the upturn from 1983 to 1990, while Germany is the most powerful economy in Europe. The Christian Democrat government in Germany has sought to talk-up' the economy in the hope of gaining votes in the federal elections. But in 1993 Germany was in recession, the economy shrinking by 1.7%. This year growth in the economy has been mainly in housing construction and restocking warehouses. Investment is still very sluggish.
Japan is only now just coming out of recession. Growth was at 0.4% for the first six months of this year. Profitability of industry is rising and forenast at 16% this year compared to a 26% fall last year. But consumer spending is low: sales in lokyo stores fell for the thirtieth month in succession in August. Investment in industry is still getting worse. The big
companies expect to cut capital
investment by 3.8% this year.
There is little chance of Japan
being a motor for the world
economy in the immediate fu-
ture.
The general picture therefore
emerges of a world economy
only slowly coming out of reces-
sion. Some countries such as the US, Australia and Canada are leading the way. This is not because they are in any way the healthiest economies. It is just that as they entered recession in 1990 - before the rest they are now showing some growth. But the underlying indicators of investment and so on show a weak recovery. Inflationary fears are forcing up interest rates. Growth in Japan and the US coupled with a big expansion of credit were big motivators of the upturn from 1983 to 1990. A lot of factors that contributed to that upturn are now missing.
Militant Labour has characterised the coming years as years of long-term depression. Weak unhealthy growth will be followed by recession. Today's world economy confirms this analysis.
Defence
spending
EFENCE SPENDING IS
D a good example of there-
sources that are wasted
under capitalism. A new jet
fighter, the Eurofighter, will cost
over $110 million each. They are
so expensive that some experts
believe that they will never be
used!
But that is chicken-feed com-
pared to the US 'Stealth'
aircraft. This aircraft is so
clever, say its makers, that it
does not need escort fighters or
radio-jamming aircraft. Which is
probably just as well as each
one costs $2bn!
The big military manufacturers
are linked by a thousand threads
to government. Military personnel
and government ministers inter-
mingle to make sure that all
sides make a fast buck.
But now it seems that some
of these threads are being cut.
With the collapse of Stalinism
capitalist governments in the
West are cutting defence budgets. US defence spending is expected to fall from a peak of 6.5% of GDP in 1986 to no more than 3.2% by 1997. By then three million defence jobs will have gone. Currently one worker in the industry is losing his or her job every every 30 seconds.
Here would lie an opportunity to use these skills for the benefit of society. Couldn't the technology available to send a crusie missile to its target be put to better use? Norman Augustine, tipped to be Lockheed Martin's next boss, replies: "I would submit that defence conversion does not consist of training unemployed aerospace workers to become unemployed autoworkers"
Meanwhile there is still plenty of profit to be made in the increasing number of national conflicts across the globe. Regional military spending in the Middle East for example is expected to run at 20%, of the regions entire GDP for the foreseeable future.
Economic
Focus
[page 19]