When the private sector collapses for a second time

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 2012 – Tony Burke, December 23rd 2011

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

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

• Borrowing figures make grim reading for Osborne – Duncan Weldon, July 21st 2011

• Economists warn of risk of double dip following poor growth figures – Claire French, January 25th 2011