When the private sector collapses for a second time

Cormac Hollingsworth looks at what happens when the private sector collapses for a second time. It begins with D and ends with ouble dip recession.

 

The squeezed middle is making many sacrifices on the promise that this would sustain economic growth. They accepted that the recession was caused by the bloated public sector.

They were lied to.

The recession was caused by a collapse in the private sector. Because the private sector was the cause, source and ground zero of the collapse, it was the pubic sector that stabilised the private sector, and its support should not have been cut too soon. And now, despite all their sacrifices, the private sector is about to collapse again, and the lie will be exposed.

For the first time since 2009 there are two clear flashing red warning signals that the private sector is about to collapse.

The first is that International Energy Agency has downgraded the demand for energy in the final quarter of 2011.

This is very unusual, as the FT reported, such falls are rare: over the last decade oil demand has posted drops only in the financial crisis.

The IEA’s comment was that they were:

“flagging that there are clearly downside risks to the global economy.”

The second is the collapse in global price of freight, down 43 per cent in the last month. Global trade is slowing at such a rate that you can now hire freight at the same price as the depths of the financial crisis in 2008.

It’s a tenet of the conservative dismantling of our welfare state that it was the bloated public sector that caused the collapse. If that were the case, then the largest cuts in public sector spending should solve the economic problem and growth should accelerate.

Confident that the private sector would accelerate once public spending was reduced, their promise was that there would not be another collapse.

At the time in 2008/9 it was hard to present the needed evidence for people that the collapse was within the private sector not in the public sector. Now we have the evidence, and the best is the employment data. During the 12 months from July 2008, the private sector shed 747,000 jobs.

To put this into context, total employment rose in the 2000’s by 1.5 million, 1.1 million in the private sector, and 400,000 in the public. The collapse of the private sector from July 2008 destroyed half of all the jobs created from 2000 to 2007.

With that level of economic shock, there was always going to be a hole in the government finances. And it was going to take time to remove the problem. And as Duncan Weldon showed, the vast majority of rise in borrowing was a fall in receipts, not a rise in spending. And receipts were not going to rise until the economy began to grow and jobs created.

The annual job creation of the economy was, on average, 260,000 places (190,000 in the private sector), so it was going to take a minimum of three years to get these people back into jobs. If the trough of the crisis was Q1 2009, high government borrowing to support the private sector was inevitable until Q1 2013 at a minimum.

But, in Q1 2011, two years too early, the government withdrew the support for the economy and started the largest pre-war cuts to government spending. They promised that this would unleash the private sector, but instead it precipitated the impending crash.

There are recent UK indicators that confirm this view.

For example, last month labour productivity growth rose above one per cent for the first time for four years. Rising productivity is normally good, but that’s with a backdrop of a growing economy. With no growth in output, rising productivity can only happen if employment falls.

In a flat-lining economy such as ours, a rise in productivity signals that struggling companies are shedding staff to try and keep going.

Three years after the crash you might wonder why this hasn’t happened until now, but companies have been keeping hold of staff in the hope of a quick recovery in the economy. They’ve decided there’s no recovery coming, and are now starting to lay people off.

The shedding of staff will be much worse and the coming slump will throw out of work all those people who went along with the cuts in spending that they thought guaranteed another slump wouldn’t happen.

The squeezed middle is going to be pretty pissed.

See also:

Manufacturers still fear a double-dip recession in 2012Tony Burke, December 23rd 2011

Unless pay gaps are reduced, we’ll end up with Victorian levels of inequalityShamik Das, November 22nd 2011

Without growth will we even halve the deficit?Cormac Hollingsworth, September 20th 2011

Borrowing figures make grim reading for OsborneDuncan Weldon, July 21st 2011

Economists warn of risk of double dip following poor growth figuresClaire French, January 25th 2011

23 Responses to “When the private sector collapses for a second time”

  1. Anonymous

    The recession was caused by a collapse in the private sector

    ===========

    Nope. The previous one was caused by people not paying their debts.

    The current one is being cause by governments not paying their debts.

    7,000 bn of government debt in the UK, 6,000 bn Enron’ed off the books.

  2. Murray Rothbard

    So, if we just employ everybody who is unemployed in the public sector, as say, equality & diversity coordination and communication team enactment co-ordinators on £50k a year, the economy will be saved ?

    The public sector does not create wealth it consumes it !

  3. Janice Brown

    When the private sector collapses for a second time http://t.co/iMBDyadp #proghaiku

  4. Helen Gutierrez

    When the private sector collapses for a second time | Left Foot Forward http://t.co/tgrCha1e

  5. Christian Wilcox

    Some grim reading on the economy: http://t.co/CXzuktli. The #Torys really are making a hash of this. #Croydon #Labour

  6. Fpvanham

    The recession was precipitated by banks and insurance firms ceasing to lend to each other, and started with the subsequent collapse of lehmann brothers, which we were not insulated from thanks to the deregulation of the financial sector. Changing the subject or sacrificing cold hard facts on the pyre of ideology doesn’t change the fact that it had nothing to do with the public sector, which in fact bailed out the industry and prevented another depression.

  7. Croydon feed

    Some grim reading on the economy: http://t.co/ekzJrCTh. The #Torys really are making a hash of this. #Croydon #Labour http://t.co/jfQcvjQ6

  8. David Ward

    You forget that this will be because of those evil europeans Cormac. Just imagine where we’d be without record low interest rates in our safe haven. Nick Robinson and the like will shudder to think of it.

  9. Matt Bromley

    .@CormacHolly asks what happens when the private sector collapses for a second time: http://t.co/sa2SkyJS

  10. BevR

    RT @leftfootfwd: When the private sector collapses for a second time http://t.co/CBLgDsdL #spartacusreport

  11. Emma Lindley

    RT @leftfootfwd: .@CormacHolly asks what happens when the private sector collapses for a second time: http://t.co/yurrJLqV << v.interesting!

  12. Knut Cayce

    RT @leftfootfwd: When the #private #sector #collapses for a second time http://t.co/eKwskPw6

  13. David Taylor

    When the private sector collapses for a second time | Left Foot Forward http://t.co/eC61Ldmn (via Instapaper)

  14. Michael

    When the private sector collapses for a second time I Left Foot Forward – http://t.co/uN2m6rN9

  15. Amanda Wilkinson

    “@TheRightArticle:When the private sector collapses for a second time http://t.co/W4d7csrS” "the squeezed middle r going to b pretty pis..d"

  16. salardeen

    When the private sector collapses for a second time I Left Foot Forward – http://t.co/uN2m6rN9

  17. cameronsfollys

    Hold on 2 yor seats folks.. it's going 2 b a bumpy ride! When the private sector collapses for a SECOND time! But.. but http://t.co/rx9HIhZG

  18. Darth Badass

    When the private sector collapses for a second time I Left Foot Forward – http://t.co/uN2m6rN9

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  23. Andrew Poulton

    @dsmitheconomics interested to know what do u make of this doom: http://t.co/blDF8ZOl

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