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Global economy faces turbulent 2014

Chancellor George Osborne believes he has found a way to secure continued support from the Tories’ corporate backers while embarrassing Labour sufficiently enough to keep Ed Miliband’s party backing austerity policies into the distant future.

His announcement that another £25 billion of cuts are needed to balance the government’s books and that welfare claimants are the target was a calculated move. His aim, says Osborne, is a smaller state.

Sounding very much like the Tea Party reactionaries in the Republican Party in Washington, Osborne managed to frighten some in his own party who know that claimants account for a small fraction of welfare spending and wonder where the cuts are going to come from.

But it was music to the ears of the bankers and international moneylenders who finance the UK government’s debt. It provides a guarantee to business that the UK will continue to be a good place to make profits. And it had the desired effect of sending Labour into another spin as they clearly have no alternatives to austerity and support the attack on claimants.
The government also says it intends to protect pensions, which is an obvious and cynical attempt at attracting support from the last segment of the population still casting votes. The “triple lock” purports to preserve the value of pension payments by ensuring they rise annually by whichever is the higher of 2.5%, the rate of inflation or average earnings.

But the faked appearance of kind-hearted, caring generosity supposedly providing protection from the effects of a further five years of austerity won’t cut much ice amongst the rapidly growing numbers who fare worst amongst all pensioners in the European Union. 

The basic UK state pension of £87.30 a week is equivalent to just 17% of the average wage. Average income for UK pensioners rises to 30% once payments related to earnings are taken into account. But this is still only half the EU average of 60%. The rate is 32.5% in Ireland, 40% in Germany and over 51% in France.

Conditions for pensioners are certain to worsen should the Tories remain in power after the 2015 election, as they ramp up the savage assault on the health and social services so many of the elderly increasingly depend upon and which form a crucial part of their real income.

But whichever flavour of government is in power will be subject to the dramatic changes now beginning to unfold in the global economy. 

The repercussions from the pre-Christmas US Federal Reserve decision to begin a reduction in the rate of credit creation through quantitative easing (QE) will become clearer as the weeks unfold. But the implications are enormous.

The benefits of QE and associated measures in the US have been astonishing for the wealthy but have failed to generate the economic recovery that the Obama administration has been banking on.

The stock market ended 2013 at an all-time high – giving shareholders their biggest annual gain in almost two decades. Corporate profits are at an all-time record peak and expected to grow in 2014. This was achieved by using extreme levels of unemployment to force wages down.

Corporate earnings now represent the largest share of the gross domestic product – and wages the smallest share of GDP – than at any time since records have been kept. And fewer Americans are working than at any time in the past three decades.

The five year post-crash orgy of credit saw $4 trillion dollars pouring into and pumping up stock and property bubbles in the so-called “emerging economies” like the Philippines, Malaysia, Indonesia and Thailand where ultra-cheap labour attracted hot-money investors. 

Watch closely and you could see them burst. Add in the credit chaos engulfing China and you have the makings of a stormy 2014 for the global economy.

Gerry Gold
Economics editor
8 January 2014

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