The 'recovery' has been very strong in company profits, and very weak in real wages - James Meadway looks at the weaknesses of the British economy
Official figures from the Office for National Statistics, out last week, show that investment by businesses in the UK has fallen for the second consecutive three-month period. Since June last year, investment has fallen from £45.8bn to £44.6bn. ONS attribute this to a decline in spending by companies operating in the North Sea, mirroring the decline in oil prices. Their investment spending has dropped by £0.5bn, from £2.09bn to £1.5bn. But clearly this is less than half the total decline in business spending on new equipment, buildings, and so on.
The mystery here, however, is that this decline in investment is occurring just as the profits recorded by UK businesses are hitting record levels. Companies, outside of the North Sea, are rolling in cash: aside from the extraordinary surpluses they are reporting, it is estimated that the largest UK companies alone are sitting on a cash pile of £53.5bn – an increase of 41% over the last year. There’s more than enough money out there to invest. And this investment matters, since without it the economy is highly unlikely to secure widespread prosperity into the future. Spending by companies on new equipment and the rest both boosts demand for labour today, and provides the basis for demand in the future.
Investment has, in general, risen since the trough of 2009-10. But this has yet to translate into consistently rising standards of living for most; instead, the economy has been very effective at producing more jobs, but often of low-paid and insecure. (The figures for self-employment are particularly striking: self-employment is at record levels, but average incomes for the self-employed have fallen by more than one-fifth in the last few years, and 80% of the self-employed now live in poverty.) The Bank of England’s optimistic forecasts for real wages this year, for instance, are highly unlikely to come to fruition without sustained investment spending by UK firms.
Real wages are central to the problem here. After an unprecedented period of decline, with average real wages (that is, wages after taking account of inflation) down by around 8% since 2007, real pay has started to pick up – driven by falling oil prices turning into a very low general rate of inflation. This impact, however, has nothing to do with conditions in the UK, with oil prices established in international markets and subject to heavy intervention – in this case, the decision of OPEC to not restrict production in November helped push oil prices to exceptional lows. Oil prices are now forecast to rise over this year.
Investment will need to increase substantially to pick up the slack. This hasn’t happened so far; instead, the recovery has been very strong in company profits, and very weak in real wages. The graph below compares what has happened to both, on ONS figures, using 1997 as a base year.
Wages have fallen. Profits (net surplus outside of the North Sea) have gone through the roof. If it’s not quite a zero-sum game, it starts to look very close to one.
The recovery has been driven by consumer spending. With real wages falling, this has come from a rise in borrowing by households. The latest figures from the Bank of England show that lending to households other than mortgages continues to rise strongly, following the pattern set over the last two years or so. Without a sustained rise in real wages, this borrowing will not prove sustainable. One striking aspect of this borrowing is the dependency of seemingly robust car sales on financing deals, with over 80% of new car sales made with some borrowing package attached, compared to less than 50% before the recession.
We’re only a few months into 2015. But it’s starting to look like a decisive year. Either the “recovery” starts to make good, and embed itself as the virtuous circle of rising wages and rising investment – just as conventional economics theory expects. Or we will continue with the ramshackle dependency on rising consumer borrowing to cover up for wobbly real wages – even as profits remain solid.
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).