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Osborne caught in glare of global recession

For the global economy, the only way is down. Britain shows where things are heading. A deepening recession intensified by austerity has created a spiral of decline in public finances. More brutal assaults on living standards are sure to follow.

Unusually low tax receipts from North Sea oil and gas production sent the UK government’s finances further into the red in July. With manufacturers reporting falling orders, it marked a further deterioration to add to nine months of recession. The rapidly worsening crisis has turned public sector finances from a £2.8 billion surplus in July last year to a deficit close to £600 million.

The decline in tax income is a self-inflicted blow by the Coalition’s chancellor, George Osborne. It is the opposite to what he’d intended in last year’s budget when he fished for a £2 billion tax rise from producers. They responded by cutting production in the already aging fields.

This contradictory outcome neatly shows the limits of political power in the global recession. Despite the ritual claims that austerity is needed to cut the deficit and bring about a return to growth, the ConDems are forced to submit to the powerful forces of contraction which have been at work in the global capitalist economy since the 2007-8 crash.

The UK has now joined the club where managing contraction is de facto policy. Spending cuts are as much about keeping borrowing costs down as anything else (yesterday the government  sold £1.35 billion of 17 year inflation-proof bonds at effectively below zero interest). Naturally, austerity measures only deepen a recession that engulfs every economy.

Japan's exports slumped in July as sales to Europe and China dropped. The 8.1% annual fall far exceeded economists' 2.9% forecast. Exports to the European Union tumbled by 25.1% from a year earlier.  

"Europe's debt crisis is the first factor to pull down exports, and the pace of decline is striking. This is comparable to the post-Lehman situation," said Masayuki Kichikawa, chief Japan economist at Bank Of America Merrill Lynch in Tokyo.

Exports to China, Japan's largest trading partner, fell 11.9% from a year earlier, the biggest decline in five months, due to lower shipments of semiconductors, electronics and car parts. "We hoped domestic demand in China would support Japan's economy, but the story is different," said Kichikawa.
 
Reflecting the sharp decline in overall exports, the Ministry of Finance figures showed Japan swung to a larger-than-expected trade deficit of 517.4 billion yen ($6.5 billion). Japan is not alone. China has shown economic growth failing to pick up after six straight quarters of decline despite two interest rate cuts and reductions in banks' required reserves.

Exports from Taiwan, a key part of the global technology supply chain, fell for a fifth straight month in July. Orders for Taiwan's exports, a predictor of demand, slumped 4.4% in July over the previous year, far more than expected. And South Korea, home to major carmakers, computer chip and flat-screen producers, recorded its sharpest fall in exports in July in nearly three years.

The deepening slump in Asia is intensifying competition for declining markets in the region. It is adding to the simmering tensions between Japan and China over the disputed Senkaku/Diaoyu islands and has provoked the biggest anti-Japan protests in seven years in cities across China in recent days.

Labourites like former chancellor Alistair Darling, backed by business and trade union leaders, are calling on Osborne to abandon austerity and “go for growth”. Wilfully or otherwise, they completely fail to grasp the systemic nature of the crisis.

There is a global surplus of productive capacity. In this context, contraction and not growth is the absolute tendency which neither Osborne’s austerity nor Obama’s spending programmes can overcome. The system of production for profit is the problem and no amount of tinkering will change that.

Gerry Gold
Economics editor
22 August 2012

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