Despite promises, and despite the forecasts, the whole country is becoming more – not less – dependent on consumer spending

rebalancing economy

Latest investment figures show spending by businesses is up 1.4% over the third quarter of the year – July to September.

nvestment has been the biggest single drag on the economy since the crash of 2008, with the huge drop in spending then pulling the whole economy in Ithe same direction, so any increase will be greeted as further evidence of the UK’s recovery.

Despite the recent increase, however, business investment is down 6.2% on the whole year, and is some £60bn down on its previous peak, before the crash. This is despite initial forecasts, confidently provided by the newly-created Office for Budget Responsibility in June 2010, of an immense boom in investment spending. Duncan Weldon, over at the TUC blog, has this graph, showing just how far feeble reality has diverged from happy expectations:

Rebalancing graph

This isn’t because firms lack money. For the last five years UK companies – particularly large UK companies – have made record distributions of profits to shareholders, and created an immense hoard of savings. Deposits by UK companies in UK banks rose from £76bn at the end of 2008, to £419bn by July this year. Instead of investing, firms are hoarding cash, and increasing dividends.

As a share of the whole economy, business investment continues to decline, as the graph below shows.


Despite promises, and despite the forecasts, the whole country is becoming more – not less – dependent on consumer spending. But with average real earnings continuing to fall, squeezed by price rises, that means increased consumer borrowing. Sure enough, this has started to pick up again, with borrowing on credit cards and other unsecured lending rising over £4bn since the start of the year, having otherwise fallen consistently since 2008. Rises in house prices, dramatically so in London, will be contributing to a wealth effect on spending, as homeowners increase their borrowing.

Exports, meanwhile, have fallen 2.4% over the same quarter, reinforcing the main point: this minimal recovery, after years of flatlining, is a reversion back to debt-led growth. The only real dynamism is supplied by consumer spending, and, with real incomes squeezed, that can only mean a return to consumer borrowing.  Far from “rebalancing” the economy, as promised, we are being marched down the path of least resistance.

From nef

James Meadway

Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).