The Battle of Baghdad or Britain?

Now the battle for Baghdad is under way, capitalist commentators are going euphoric. The war against Saddam could possibly be over in days. The stock market is already rocketing up on the prospect. Once the war is over, the world will be relieved and households will start spending again. Renewed spending will convince chief executives of the big companies that sales will pick up and they can invest again. Within months the world's major economies, particularly those of the victors, the US and the UK, will leap forward, at 2%, 3% or even 4%! Capitalism is renewed, such is the current mantra.

Of course, only a week or so ago those who are now so optimistic were complaining that the war was going badly, that 'the coalition of the willing' would be bogged down in Iraq for months or years with growing casualties. Such is the fickle nature of the capitalist casino economy.

But just in the same way that optimism rules now, it won't be long before pessimism returns - and this time with more justification. Whatever the result of the war in Iraq, the world capitalist economy is slowing to a halt and that won't be changed by the victory or otherwise of the generals of the coalition.

Take the UK economy. Well before the war began, Britain's economic activity was dying. Manufacturing output is falling at a 2% annual rate and Britain's company purchasing managers report that their order books have suffered the sharpest decline in 18 months.

Retail sales are also trending downwards as British people pull in their horns and buy fewer cars, electrical goods and clothes. The mainstay of the UK economy has been property. The great British housing boom has driven up the paper wealth of the average house owner. That has made them willing to borrow more and spend it. But even here, despite very low mortgage rates, there are signs that the housing market is peaking. It's true that prices still seem to rising. In the three months to March this year, they were still rising at a 23% rate according to the Halifax.

But the monthly rise in March of 1.1% was less than in February and average rises hide significant falls in London and the South East, areas key to keeping the consumer spending. There are lots more houses on the market as sellers try to catch the 'peak' of the market. But more supply will eventually mean falling prices. Any cracks in the property market will spell doom for sales in the shops and profits for corporations.

Indeed, business profitability in the UK is at its lowest level for a decade. The rate of profit is down to 11.4%, with manufacturing profitability at just 6%. Even the service sector's overall profitability is just 13%, unchanged from 2001.

Behind these figures lies the relative weakness of UK capitalism compared to the rest of the top seven capitalist economies. When New Labour came to office in 1997, 'Mr Prudent', Gordon Brown, told us that he would concentrate, not on short-term measures to boost the economy, but on long-term ones to encourage British capitalists to invest and raise the productivity of their workforce. So he has slashed taxes on business while raising them for the average family and he has 'deregulated' controls to make it easier for big business to do what they want. What has been the result?

Well, since 1997 annual growth in productivity has been 1.3%. Under the Tories it was 2% a year! Indeed, British capitalists have failed to invest in the economy's future. The UK's stock of capital equipment and plant per worker is 80% less than in France and 45% less than in the US and Germany - so much for the success of getting British capitalists to invest!

And the much-vaunted skills of British scientists have not been translated into the successful innovations. British capitalists applied for 80 new patents in 2000 compared to 230 in Germany, 120 in France and 100 in the US. While the US spends $1100 per worker on research, Japan $900, Germany $800 and France $620, the UK spends just $370. And investment in better skilled workers is also missing. While nearly 25% of British and American workers have no skills at all, only 6% of Germans don't and the rate is even lower in Japan and Sweden.

British capitalism is still an effete, rentier economy depending on squeezing profits out of other more productive economies through banking and financial services. The trouble with such a parasitic economy is that it can only work for a country that does not have too many people, is regarded as safe and secret for hiding money and is never involved in wars. That's Switzerland, not Britain. The collapse in the stock markets of the world over the last three years is setting the scene for a collapse in the property market bubble. Then the UK economy will be exposed for its weakness.

As the British economy slows to a halt, the key traffic light indicators of the structural weakness of British capitalism will turn from green to amber then red. The two key indicators are the balance of trade with the rest of the world and the size of the government's deficit. Just as in the US, which is running increasingly large twin deficits (5% of GDP for its balance of payments with the world and 3% of GDP for its budget deficit and rising); the UK economy is beginning to do so as well. Only in the UK's case, it does not have a currency that everybody trades and invests in to keep it going.

In trade, UK exports to Europe have slowed from a 10% growth rate in 2002 to a fall of 1.6% in the last three months. Meanwhile spending in the shops has driven up imports by nearly 4% a year. As a result, Britain's trade deficit in goods with the EU, where nearly 60% of its trade goes, has widened from £3.3bn in 2000 to £9.2bn in 2002 - a tripling!

And the government's deficit is also rising. Gordon Brown presents his 2003 budget this week. He has already announced that the Battle for Baghdad will cost the British taxpayer at least an extra £5bn. And he is already forecasting that he will have to borrow around £25bn for this year to balance the government's books. It is likely to be much more as he bases his forecast on an assumption that the British economy will grow by 2.75% this coming year. There's no chance of that.

The Battle of Baghdad is under way. Back in Britain, the traffic light economic indicators are turning from amber to red. The Battle of Britain is still to come.