The world economy: prospects for 2013

When I sat down to write this post on the prospects for the world economy in 2013, I thought I’d better check back to see what I said this time last year about 2012.  After all, economic forecasting has a well-deserved, terrible reputation for inaccuracy. It’s mostly useless, or at least mainstream economics is pretty hopeless at it. There is no space in this post to explain the reasons why – maybe another time.

But anyway, when I read my post on 2012, it seemed to me that the analysis would hardly change for 2013.  So I thought I would repeat the points made at the end of December 2011 and then comment on the differences (if any) now.

I started last year by saying that “2011 was a pretty awful year for the major capitalist economies.”  Last year, I forecast that 2012 compared to 2011 would look “little better, except maybe for the US and Japan – relatively.”

Well, that was broadly right except that Japan performed worse than I expected. Most forecasters were less optimistic about 2012, especially as several thought that the Eurozone would break up before the end of 2012. And 2012 was indeed pretty awful for world capitalism. World economy growth was just 3.5% in real terms, hardly enough to stop unemployment in industry and services rising. In the major advanced capitalist economies, the US grew best at 2% while the bulk of Europe and Japan performed worse than in 2011, with the core of Europe failing to grow by more than 2% while southern Europe entered a depression with little sign of recovery.

As for emerging economies, I commented last December that “the large emerging economies of India, Brazil, South Africa and China are also slowing fast.  India is now growing at only 5% a year, down from 9% at the beginning of 2011, China is slipping towards 7% from 10%, while Brazil has dropped back under 4%.  These growth rates are still much higher than the mature capitalist economies, but given that the emerging economies need to absorb a massive influx of agricultural peasants into the cities for urban employment, the emerging economies need to grow faster in order to create sufficient jobs.” Well, 2012 continued that record. Indeed, it was even worse than expected for the so-called BRIC economies of Brazil and India.

In 2012, unemployment rates fell slightly over 2011 in the US and the UK, but in most of Europe they were worse and youth unemployment continues to hit new highs in most countries. Moreover, the most worrying development was that long-term unemployment has never been higher since the Great Depression. If you lose your job, your chances of getting another have never been so bad. Indeed, in the US, the average length of time without a job for those seeking one is at an all-time record high. The ‘reserve army of labour’ stays constantly large.

Just as I said this time last year, “since the trough of 2009, the major capitalist economies have generally failed to achieve even their former long-term average growth rates and some of them are still contracting.” By the end of 2012, several key capitalist economies had still not got back to their peaks prior to the crisis at end-2007, five years ago.

In last year’s post, I cited two key reasons why capitalism has not recovered ‘normally’ after the Great Recession of 2008-9. The first was that “the rate of profit in the largest and most important capitalist economy, the US, is still in its downward phase…Since US profitability peaked in 1997, that rate has not been surpassed… That has reduced the incentive of the productive sectors of capitalism (manufacturing, transport and services), at least in the advanced capitalist economies, to make new investments and employ more labour over the period since 1997 compared to the period 1982-97.”

That reason was further confirmed in 2012. Rates of profit in the major economies remain below the level reached in 2007, while the level of the mass of profit is still well below the previous peaks. In the US, in 2012, the rate of profit was broadly flat compared to 2011. And that is despite the continued rise in the mass of corporate profits to near record highs, depending of how you measure it.

The failure of profitability to return to previous levels has dampened any recovery in business investment, which is the key to sustained recovery. So, although labour ‘compensation’ as a share of GDP has fallen to a 50-year low to boost profits and increase inequality, there is still no move out of this Long Depression.

I had expected the US rate of profit to fall in 2012. Instead it has stagnated mainly because of this extraordinary rise in the rate of exploitation. But here is a forecast (!). This is unlikely to continue in 2013. Already US corporate profit growth is slowing. Raising the rate of exploitation will not be sufficient to support profitability in 2013. The US rate of profit will fall in the coming year.

I repeat what I said about 2012, “that does not mean a new economic slump (yet)”. I argued that “the history of US capitalism since 1945 suggests that, as the corporate rate of profit falls, eventually the overall mass of profit will peak and fall back. But it can take a lag of some three years or so. That suggests a new crisis of production in the US around 2014 onwards – but not yet.” That’s my key forecast again (help!).

The experience of 2012 confirmed my view that capitalism is really in a long depression similar to that of the 1880s and 1890s that is different from the ‘normal’ cycle of slump and recovery experienced say in the crisis period of 1965-82 or in the ‘boom’ period of so-called neo-liberalism of 1982-97.  I expect 2013 to do the same.

The other major reason for the continued depression “is to be found in the proximate cause of the Great Recession, namely the huge rise in debt or credit (or what Marx called fictitious capital) that delayed the underlying crisis in capitalist production and stimulated the unprecedented bubble in housing and property in the US and elsewhere.”

Some of this debt has been ‘deleveraged’ or liquidated over the last four years. In 2012, US household net wealth recovered in nominal terms (although in real terms, it is still well below that of 2007). The main reason was a reduction in debt (mortgage defaults) and a recovery in share prices (although that mainly benefits the rich).

While private sector debt (corporate and household) as a share of GDP fell, public sector debt ratios rose again in 2012. Since peaking in 2007, US household debt to GDP has fallen 7%, corporate debt is static, but government debt to GDP has jumped 50%. Debt owed to foreigners has also risen, so overall debt has actually risen by 9%. So some deleveraging in the capitalist sector but none overall.

The big debate among mainstream economists in 2012 was whether the policy of austerity adopted in varying degrees by governments was working to cleanse the economy of debt, or instead was making things worse. I covered this question in many posts during 2012. Those governments that adopted more severe austerity saw their economies do generally worse than those that were a little less draconian. But it was marginal. What drove the likes of Spain or Japan in 2012 into slump was not policies of austerity. In the case of the former, fiscal cliffs have only just started to be employed. In the case of the latter, fiscal expansion not austerity is on the agenda of the new conservative government.

But austerity will not go away because it is a necessary part of capitalist economic policy, not just a mad ideological binge, as Keynesians like to argue. As I said, this time last year, “Any increase in government spending begins to encroach on the private sector’s ability to make profit, both through increased taxation and also through competing with the private sector in various areas of investment. Of course, pro-capitalist governments bend over backwards to reduce that burden through cutting corporate taxes (and shifting the burden of taxation onto households and onto any spending by households). …But even so, over the long term, if government debt keeps rising or does not fall, it will become an albatross around the capitalist sector, reducing its ability or willingness to invest.  That is why debt matters, contrary to the view of the Keynesians, who see government spending (through borrowing or not) as the way out of recession.  “

To sum up, in 2013, economic growth in the major economies is likely to be much the same as in 2012 – pretty weak and below long-term averages. But 2013 is not likely to see a return of a big slump in capitalism. I do not expect the US to grow faster than in 2012 and Europe and Japan will struggle to grow at all. The key emerging economies may do a little better than in 2012, as China’s state-directed economy under new leaders invests more. But on the whole, it will be another poor year.  It’s going to take another nasty slump to get capital (both real and fictitious) looking ‘mean and lean’.  So the Long Depression will enter its sixth year with no prospect of respite yet. We are in uncharted waters.

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21 Responses to “The world economy: prospects for 2013”

  1. Reuven Kaminer Says:

    Excellent, measured and thorough.

  2. Alen Says:

    What are your predictions on the eurozone, and on the prospects of its disintegration, in particular?

    • michael roberts Says:

      Alen

      I have covered the prospects for the Eurozone in many past posts. In general, I think that the Euro area will survive if economic growth returns to the region. But if there is a new global slump in the next few years, the prospects for the euro area surviving in its current form are much reduced. However, it will survive in 2013 because Europe’s economic situation will not be worse than in 2012 (bad enough though it is) and the Germans and French continue to agree that it is better to keep the likes of Spain and Italy in the project, as well as the small distressed states like Greece or Portugal, even if it costs more money, because the alternative of break up is even more expensive. But that view could change if another slump comes along. And of course, the strategy of the Euro leaders is not entirely in their hands. The people may have a say in the outcome in Greece etc.

  3. paulc Says:

    “…over the long term, if government debt keeps rising or does not fall, it will become an albatross around the capitalist sector, reducing its ability or willingness to invest. That is why debt matters, contrary to the view of the Keynesians, who see government spending (through borrowing or not) as the way out of recession. “

    Why specifically is ‘Government debt’ an albatross ‘around the capitalist sector’s neck? Private debt diminishes consumption so limiting potential for investment and corporate debt does likewise yet Government debt need not be financed by taxation right now, rather by borrowing at historic low interest rates and ‘printing’ as in £325 billion worth of debt issued through QE so far in the UK which is in effect money owed by the Government to itself so in reality can be subtracted from total Gov’ debt.

  4. Julian Says:

    I appreciate your blogging. As I see it however, we are entering an era of resource depletion, especially oil, the lifeblood of our fossil fuelled 300 year spree of hypergrowth. I don’t see how there can be any kind of return to a growth economy, I think we are entering an era of a bumpy downslope, where there will be flimsy returns to “economic health” followed by further recessions.

    A complete rethink is needed, but I don’t see the likelihood of this from the political classes

  5. GrahamB Says:

    I agree with your general prognosis for 2013: more of the same. Where I differ in emphasis (as you do discuss the points I want to make) is the reason for low business investment – in the US it’s still around 20% lower than the pre-crisis level.

    Profitability obviously recovered in 2009-10 and has at least been maintained in 2011-12. Your fundamental assertion, as far as I can see, is that it’s still not high enough to induce investment at or above the pre-crisis level.

    For non-SMEs, capital is not the major problem – corporate gross cash balances in the US, UK and EZ are at record levels.. In “normal” times it’s a race for units of capital to be the first to invest, steal a march on their competitors and generate temporary super profits. But this isn’t normal times and there are a number of reasons for low investment – that do not necessitate introducing any long-term downwards trend in profitability:

    1. Politico-economic: EZ crisis, debt ceilings and fiscal cliffs, etc. “Confidence” as they call it. This period – to date – of recessions, stagnation and low growth is not unexpected after such a massive financial crisis and the Great Recession.

    2. Related to above, the nature of the competitive market. No individual capitalist is willing to jump first and sink capital given the risk adverse environment.

    3. Most importantly, profitability has been maintained by increasing exploitation through cutting real wages (including the social wage) and working harder. It’s been too easy for capitalists, emerging from a crisis of the neo-liberal era, to reduce costs rather than investing in productivity growth.

    Unlike the Keynesian view, profitability – not demand – drives investment, but as hoarding illustrates it’s not automatic and it doesn’t necessarily follow that low profitability is the cause.

    They haven’t finished yet and believe there is more to be squeezed out of workers. Whether that is true is as much political as economic and we
    shall see.

  6. John McLeod Says:

    Michael:

    This might be a stupid question but why does a fall in profitability necessarily depress investment? The rate of profit in manufacturing has been in decline since the 1970’s. Along with cutting wages (with the help of neoliberal economic policy), investment in productivity (to increase efficiency) has been the primary method of cutting costs for manufacturing corporations. This only leads to further falls in utilization of capacity (which has also been decreasing in manufacturing since the 70’s) and some argue it is the cause of a crisis of global industrial overproduction that was born in the 70’s and brought us to the current economic malaise. As long as credit is cheap (and it has been the past two decades) firms still stand to benefit from investing in productivity to undercut their competitors.

    • michael roberts Says:

      A fall in the rate of profit wont necessarily depress investment. If the mass of profit continues to rise by through increased accumulation, then investment will continue. The tipping point for crisis is when the rate of profit falls sufficiently to stop the mass of profit rising. Then investment will stop (usually within a year or so). In my view, I think Marx argues that competition intensifies as the rate of profit falls, not vice versa as I think Robert Brenner argues. So it is not overproduction of capital in industry that causes crises, but overaccumulation of capital relative to profit in all sectors.

  7. matthewrusso9 Says:

    In “The Failure of Capitalist Production”, Andrew Kliman makes a convincing case against the “Sweezy thesis” of a fall in wages/salaries as a percentage of US GDP. Kliman points out that both employer non-wage compensation and net government social benefits comprise an increasing percentage of the “total” wage, to the point where that total wage has been basically trendless – not falling – since the 1970’s. (pgs. 154-160)

    That would go a long way in explaining the real purpose of public sector “austerity”: It has little to do with “public debt levels” and other such albatrosses ; rather, in the face of the failure to recover the postwar ROP levels, increasing the rate of exploitation is the only alternative for the capitalist class as a whole. Since an increasing percentage of the total wage comes from either from non-wage compensation or state provided benefits, that is where it must be increased, by cutting social benefits and offloading non-wage variable capital costs (such as health insurance and pension benefits, etc.) onto the wage.

    • GrahamB Says:

      I’m not sure that a decline in real wages can be coined the “Sweezy thesis”. I always considered Sweezy/Baran/MR as in the underconsumptionist school and it is perfectly possible to posit
      declining wages without coming to underconsumptionist conclusions. Isn’t Andrew Kliman’s work on “total” wages a minority view amongst Marxist economists, including those that are orthodox in the sense that Marx was not an underconsumptionist? (Of course this doesn’t necessarily make it wrong).

      I fully agree that austerity is much more to do with cutting total employee compensation and increasing the rate of exploitation than deficit reduction. But I don’t think it follows that this must be the result of the failure of the ROP to recover – whether your benchmark is postwar or 1997. It isn’t the only alternative – as the cash mountains show – but is the one that capitalists have chosen.

      Why? “Confidence” does play a role in a period like the current one, as it influences the behaviour of individual capitalists that are in competition
      and their investment decisions.

      Second, given such indecision by the capitalist class as a whole, the question for individual capitalists becomes: how else can I improve
      profitability? All crises are coloured by the era in which they occur and neo-liberalism in the “West” has provided capitalism with a model that
      they have been pursing with a vengeance since the initial recovery from crisis.

  8. louisproyect Says:

    Michael, have you had a look at this?

    This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history. The paper is only about the United States and views the future from 2007 while pretending that the financial crisis did not happen. Its point of departure is growth in per-capita real GDP in the frontier country since 1300, the U.K. until 1906 and the U.S. afterwards. Growth in this frontier gradually accelerated after 1750, reached a peak in the middle of the 20th century, and has been slowing down since. The paper is about “how much further could the frontier growth rate decline?”

    full:

    http://faculty-web.at.northwestern.edu/economics/gordon/Is%20US%20Economic%20Growth%20Over.pdf

  9. Edgar Says:

    Over the last 30 years or so workers have suffered one defeat after another, with wages and conditions worsening and private debt soaring, yet some claim that despite this, capitalism has not sought to reduce workers share of national income. The reason some can say this is that they include the wages of higher managment in wages and exclude it from profits. A fundamental mistake I think, especially if we consider surplus value as a way of reproducing the ruling class, and surplus value only makes sense with this assumption I think.

    My belief is that the whole economic problems are concerned with the re-balance and re-structuring of the economy from a national to a global level and a re-balancing between East and West. I.e. structural and perfectly normal under a capitalist system.

  10. billj Says:

    World growth of “only” 3.5%? Interesting use of “only”. The US rate of profit rose last year to its highest level since 1965. Given ongoing QE, the recovery in residential construction, fall in unemployment, 4 million private sector jobs created in the last two years, etc. that seems likely to continue.

    • michael roberts Says:

      Hi Bill. I think you are suggesting the use of the word ‘only’ distorts the reality, which is that global growth is really very good. Well, the IMF reckons real GDP growth in 2013 will be 3.6%, up from 3.3% in 2012 but down from 5.1% in 2011. This recovery since 2009 has so far averaged about 4% a year globally, which I suppose is not bad. Previous global growth recoveries have averaged: 3.5% in the 1980s, 3.4% in the 1990s, and 4.4% in the 2000s. The great explosion of economic growth in the BRICs from the late 1990s has driven up global growth rates and these large emerging economies are also a larger part of the global economy than before. So this hides the weakness in the mature advanced capitalist economies. The 1980s recovery rate for the major capitalist economies (still 85% of the global economy) was 3.9% a year but in the 1990s recovery it was under 3% and in the 2000s it was just 2.6%. In the current recovery so far, it is only 2% and on current forecasts for 2013, the average will fall to 1.8% a year. So major capitalist economies are not doing great.

      As you know, I would dispute that the rate of profit in the US has returned to its highest since 1965. I reckon the peak of 1997 has not been surpassed. And we are set for a fall this year. The jobs recovery is well below previous recoveries. But the US economy is not going into a slump this year – on that we can agree.

      • billj Says:

        Obviously growth was going to slow after the initial very strong recovery post recession. But growth of 4% a year n average is not slow.
        The older powers are not 85% of the world economy. In money terms they are probably about 55% of the world economy, and in PPP terms already less than 50%.You also need to remember that the official agencies of Western neo classical economics measured the collapse of the central plan as the collapse of GDP instead of the creation of it. So the figures for the 1990s grossly understate the growth of the world market with the transition of the central planned economies to capitalism.
        The US jobs recovery is not noticeably weaker than previous recoveries, its just the losses were much greater, mainly due to the weakness of the working class. calculated risk blog has got all the graphs.
        Well there’s lots of different measures of the rop, the figures for 2012 are not available yet, but based on an extrapolation from the first three quarters, then its imo at 1965 levels, you might show it a little lower, but I’m sure the trend will be the same.

      • michael roberts Says:

        Sorry, I meant that the advanced capitalist economies were 85% of the economy in the 1980s (on a market dollar basis). It remained above 80% through to the end of the 1990s when the EMs really took off. The IMF reckons that the advanced capitalist economies contributed 50% of world GDP in 2012 on PPP terms, as you say. But I prefer market dollars for international comparisons as the PPP measure biases EM GDP upwards. On a market dollar basis, the advanced capitalist share was 62% in 2012 (so higher than 55%). But it was 75% just before the crisis broke. Since 2008, when the global slump began, market dollar GDP of the advanced capitalist economies has risen just $2trn while global GDP is up $10trn. So its share has slumped dramatically. But the rise of the EMs and globalisation shows that capitalism is not yet a spent force as I have discussed in previous posts. There are still areas of the world for new exploitation.

        The US jobs recovery is by any measure very weak this time. US employment is still 3.5% below its last peak after 54 months. In previous recovery periods after a slump, the previous peak had been surpassed by then – most after just 24 months. And in percentage terms, the recovery from the trough has been less than every other recovery period except after 2001.

        We’ve discussed the US ROP before.

      • GrahamB Says:

        Advanced economies share of global GDP on current prices is 62% (IMF for 2012) and 47% for the G7. On PPP, it’s 50% and 38% respectively.

        I think it would be interesting to look at the relationship between profitability and investment in the G7 over the decades; I don’t think it’s direct.

  11. billj Says:

    Hi Michael, I don’t think you contradict me on the jobs recovery, its not so much that the recovery is weak, just that the fall was very great. Hence the length of time required to make up job losses.
    On market shares you need to remember that the advanced category has changed since the 1980s. It now includes various previously non-capitalist economies, like Poland and Russia. Nonetheless, the trend is dramatically down in terms of market share for the advanced category, not least due to the appreciation of the currencies of the emerging markets.
    On the rop there are different estimates, I’m fine with that provided people explain their methodology, as you do. But the trend and general level is usually pretty similar, even if the details conflict to a degree. Basically, the US rop has risen dramatically since its slump in 2009, towards or at its mid 1960s levels.

  12. Daniel de França MTd2 Says:

    Hi Michael,

    If you take a look at the Dow Jones Industrial average, you will see it is near an all time high, just like in Sep 2007:

    http://www.macrotrends.org/1358/dow-jones-industrial-average-last-10-years

    It looks like that we will have another crisis of over production this year, doesn’t it?

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