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A widening social divide destroys prospects for economic recovery

The latest ONS (Office of National Statistics) figures on incomes tell a frightening story. Average earnings fell last year in real terms by 4.6%, a huge drop. Since UK median earnings are now £410 a week and inflation is now running at 5% a week, that represents a fall in disposable income of nearly £19 a week. This of course hits the poorest hardest, for two reasons. Their gross pay increase of the bottom tenth in this last year was only one-third of the gross pay increase of the top tenth.

Worse, the bottom tenth, i.e. those paid less than £286 a week (only slightly above the national minimum wage of £228 a week), have a much lower wage to start with before being faced with a big inflationary cut in their real incomes to cope with soaring food and energy bills. In terms of social harshness that’s bad enough. But the economic consequences are even more serious.

Where is the aggregate demand to come from to boost consumer confidence and generate growth? The trick has always been with capitalism to keep wages low in order to try to compete with Chinese imports and to drive up profits, but not so low as to diminish demand for all the goods coming off the production line. With austerity biting ever harder, that point has been crossed. Consumer expectations are at a record low, and with an average cut in disposable income of nearly £19 a week (a very significant sum in poorer households), demand will plummet, sales will fall, some firms will go bankrupt, and unemployment will rise – a classic vicious spiral which is now gripping Britain.

What makes all this much more serious is that all the other main sources of demand are drying up at the same time. Export markets are fading fast because of the Eurozone sovereign debt crisis (with hitherto 60% of UK exports going to the EU), US markets are flat because of continuing bombed out housing and labour markets as well as political paralysis, and even the Chinese economy is losing steam partly because its own export markets to the US and EU are now badly dented. That leaves household borrowing, still at the huge level of £1,350bn.

But the key point is that this colossal indebtedness – a credit bubble driving demand – is now coming down, not up, as householders painfully, thoiugh wisely, seek to reduce their debts wherever they can. Add in the Government’s horribly misguided 5-year austerity programme, and a disastrous double dip is now certain.

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