The Big Squeeze

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There is now much discussion about whether the British economy is heading back into recession.

The British economy shrank by 6.5 percent between the spring of 2008 and autumn of 2009. The recovery since then has been anaemic, with growth in the three months to June just 0.2 percent. Output remains significantly below its pre-crisis peak in early 2008. It's clear that most working class people are feeling the pinch, as unemployment rises and living standards are being sharply squeezed even for those in work. Unemployment at the end of June stood at 2.49 million, up nearly 40,000 on three months earlier. The number of people claiming out of work benefits increased at its fastest rate since May 2009.

"Underemployment" is also increasing - 1.26 million people are working part-time who are looking for full-time work, the highest figure since 1992.
Unemployment among women, disproportionately affected by public sector job cuts, is at its highest level since the late 1980s.

And around one in five young people are out of work. The number of 16 to 24 year olds classed as out of work stands at 20.2 percent, or just under a million. Chris Grayling, the employment secretary, claims the real figure is "much lower", as the given figures include students looking for work - though this is hardly an optional extra for many students faced with rising debts and many young people have stayed in or gone back to college as jobs have dried up. But even excluding students, the figure for youth unemployment is still 18.8 percent.
And, unlike through most of the 1980s, those in work are also seeing their incomes hit.

Basic pay "rises" are running at 2.2 percent, which is half even the government's preferred (and lower) measure of inflation, in other words a pay cut. No wonder a report from economic researchers Markit at the end of August could record that almost two in five households say their finances got worse in July and August. Just 6 percent reported an improvement.

The picture will probably get worse. One way the British state responded to the global crisis was to allow its currency to devalue to boost exports, an option not available to peripheral European eurozone countries. But Britain's main export markets in Europe and the US are now facing sharp economic slowdowns. Exporting out of the crisis looks less and less likely too succeed.

After the financial crash there was talk of the need to "rebalance" the economy away from overdependence on the banks in the City of London. This hasn't happened. The City bounced back thanks to huge state intervention, but industry's output is 8 percent less than four years ago. Manufacturing shrank by 0.5 percent in the three months to June.

If the renewed tremors on the global financial markets and continued vulnerability of the European banking system turn into a full-blown crisis, Britain is unlikely to escape unscathed. The ability of the state to intervene this time to stave off collapse may be considerably less. All of this is likely to have two effects. Firstly, it means that there is very limited room for the government to make any concessions over cuts, for example in negotiations with the unions over public sector pensions.

Secondly, the debate inside the ruling class over the pace and scale of George Osborne's spending cuts is likely to get louder.