Global Economic Crisis
Green Shoots or wishful thinking?
“We are gathering more and more evidence that the recession is over” – Alan Clarke – Economist BNP Paribas
Alistair Darling, the beleaguered New Labour chancellor, was widely derided for predicting that Britain’s worst recession since the 1930’s would be over by the end of 2009. Darling’s assertion in the March budget was filed into a similar category of self-delusion as those who claimed at the start of the First World War that the troops would be home by Christmas.
However, recently various economic forecasters have insisted that there are “green shoots of recovery” visible in the British economy and for that matter in the US and some other countries as well. They have cited as evidence the fact that UK industrial output rose by 0.2% in April and 0.1% in May – the first increases since February 2008. This came hot on the heels of Halifax’s house price figures that found house prices rising in April and a report showing a return to some growth in the service sector.
The stock market is up around 25% on its low at the beginning of the year. The National Institute of Economic and Social Research report out at the start of June claimed there was a “broader picture of stabilisation” in the economy. So are we seeing an end to the global economic crisis?
Unfortunately, for Gordon Brown and Alistair Darling who hope to hold a general election next year on the back of an economic recovery the answer is no – not by a long way. As Winston Churchill once said; “This is not the end, it is not even the beginning of the end but it is perhaps the end of the beginning.”
A slowdown in the slowdown
The small recovery in industrial production in the UK in April and May has to be set against the 12.6% fall in output over the year to the end of April 2009. The OECD using more apposite language described the current economic situation as showing; “The UK economy is getting worse at a slower pace.”
The OECD is still predicting a 3.7% contraction in the British economy this year, 4% in the US, 6.6% in Japan and a 4% slump in the Eurozone as a whole. While there has been a deceleration of the economic freefall that was at its height between October 2008 and March 2009, all the evidence and balance of forces in the world economy point to a long period of economic decline and stagnation for a number of years.
Part, if not a majority of the reason for the very modest increase in economic activity in some sectors has been a consequence of the slashing of production through the introduction of short-term working and even shutdowns as was the case with Honda in Swindon. The Financial Times survey recently found that 1 in 4 workers have had their hours reduced as a result of the recession in the UK. This had the effect of running down the inventory and overproduction of goods at a factory level. Rather than an indication of a recovering market this small pick-up reflects a return to production to restock their inventory.
There is still a major problem in the economy of over capacity – that is the gap between the productive potential of capitalism to produce goods and their ability to find a market to sell them profitably. This will worsen as unemployment continues to grow.
Stimulus packages
As the Socialist has commented before, the Keynesian style stimulus packages in the US, Britain, Europe and especially China were significant and prevented a collapse of the global financial system and may have averted a 1930’s type depression for the world economy. Capitalist governments hoped to find a bottom to the severe recession through direct measures to prop up the financial system and then kick start the economy through government spending.
Even if a bottom is being found to the recession in some countries a return to significant growth rates are ruled out. In fact even in the unlikely event of a technical end to the recession in the UK later this year – any return to growth will be so weak and aenemic as to being incapable to stop the inexorable march of unemployment which is likely to hit 10% in Britain, the US and Europe. Nor would it rule out another recession – a double dip – at a later stage in this crisis of the world capitalist system.
Leading economist Nouriel Roubini has poured cold water on the green shoots theory when he wrote; “hopes that “green shoots” of recovery may be springing up have been dashed by plenty of yellow weeds. Recent data on employment, retail sales, industrial production, and housing in the United States remain very weak; Europe’s first quarter GDP growth data is dismal; Japan’s economy is still comatose; and even China – which is recovering – has very weak exports. Thus, the consensus view that the global economy will soon bottom out has proven – once again – to be overly optimistic.” (June 8th 2009)
Despite the huge, in capitalist terms, stimulus packages and banking bailouts, unemployment in the US rose again by over 500,000 in May to a 26 year high of 8.9%.
Almost 6 million workers have seen their jobs go since the start of the recession in December 2007. Leading economist and Professor at Columbia University Joseph Stiglitz commented: “The bottom may be near but that does not mean the economy is set for recovery any time soon.”
The idea that the worst of the crisis is over is fanciful under the economic conditions that exist today. A combination of a synchronised global downturn, a still struggling banking sector and a crisis in the so-called “real” economy is almost certain to result in a long period of stagnation even when this initial phase of the downturn ends.
The key reasons for this is that the collapse of the debt driven boom has produced a severe retraction in consumer spending while exports and world trade have fallen off a cliff.
The collapse in house prices, more than 30% in the US and a similar level in the UK, has devastated household wealth. The financial system is still “not fit for purpose” with debt-laden “Zombie banks” threatening a new financial shock. The levels of debt both of consumers, the financial sector and of corporations will make it impossible to return to rapid growth for a whole period. As Stiglitz put it: “In spite of some spring sprouts we should prepare for another dark winter.”
A lost decade?
Nobel price winner for economics, Paul Krugman, has been giving a series of lectures recently explaining his fear that the world economy will experience a “lost decade” similar to Japan in the 1990’s when for 10 years Japan suffered from little or no growth after a financial bubble burst. This year – 2009 – Japan is only expected to return its 1992 level of economic output as measured by GDP.
Unemployment – expected to rise by 50 million across the globe and to over 3 million in the UK – will result in further cuts in consumer spending and more unpaid debt in mortgages, credit cards and loans putting more pressure on a weakened banking system.
Mass unemployment will also dramatically cut tax revenues for governments and restrict the market available for big business to sell their commodities. This will most likely result in a long period of economic stagnation lasting perhaps for years. The dreaded L – shaped outlook for the world economy. Despite the fiscal stimulus and Keynesian style investment that has been pumped into the world economy, increasingly the bosses and big business governments will resort to trying to unload the crisis onto the backs of the working class and the poor internationally through assaults on living standards and slashing of public spending.
In a telling exchange between Gordon Brown and Tory leader David Cameron at Prime Ministers Questions recently Brown accused the Tories – correctly – of planning 10% across the board cuts in public spending should they win the election. Cameron’s reply was to point out that New Labour were intent on a 7% cut. That is the choice for working class people – slash and burn policies and mass unemployment is the only menu offered from all of the main parties.
For working people there will be no choice but to resist these attacks. That’s why we need to urgently build fighting trade unions in response to the capitalists offensive. We also need to see the emergence of new mass parties of the working class to provide a political alternative to the rotten political establishment.
Capitalism is a Zombie system – effectively dead as a progressive force that can develop human society – but it still walks and feeds off the living creating poverty and devastation in its wake. We require a movement to put an end to it and replace it with a democratic socialist planned economy internationally.
