The latest economic activity indexes for various parts of the world show a pick-up in activity in the major capitalist economies. These indexes are surveys of purchasing managers in companies, called PMIs. They are not measures of the actual production or sales but of sentiment of corporations about the economy. When the index is above 50, that suggests growth in the manufacturing or service sector of that economy. The October PMIs show a rise in the combined manufacturing and services indexes nearly everywhere, suggesting that economic growth in the major economies is accelerating – with the largest rises in the UK and the US. Even the Eurozone was up from September.
However, the world PMI, which aggregates all the PMIs, fell in October. It is still above 50, so the world economy is expanding but at a slower pace than in September. Why was that if the major economies were accelerating. The answer is that the largest emerging capitalist economies, like Brazil or India or Indonesia, slowed significantly in October, as they have been doing for a few months. The BRICs are barely growing right now, according to the PMI data.
But let’s be clear, the PMIs measure the derivative of growth; they show whether there is an expansion or contraction in an economy and they are only sentiment surveys. They do not show what is the actual rate of real GDP growth in any economy or in the world economy. Thus, the Eurozone may be expanding, but only from contracting earlier. it may have zero GDP growth. Indeed, if we look at global real GDP growth, world capitalism is moving tortoise-like, well below its long-term trend growth of just under 4% a year. Per capita real GDP growth (after taking into account any increase in population) is even slower. And the forecast out to 2015 suggests no acceleration at all.
Of the major capitalist economies, the US has been growing the fastest, currently at about a 2% pace. That’s all – no other top seven capitalist economy is growing even at that pace. If we look at the US PMI, called ISM there, the economy remains below my benchmark for a boom, but better than this time last year.
A more high-frequency measure, but more volatile, is the ECRI index of US economic activity. It too puts the US economy in a low-growth mode (the graph only goes back to 2008, note).
It is useful to compare the trend of per capita real GDP in the US (blue line) and in the Eurozone (yellow line), as shown in the Figure below. The graph shows a decline in real average incomes since 2007-2008 in both areas. The impact of the Great Recession on the US was larger, the decrease in per capita income is of – $2,459 at constant prices (-6 %), compared a fall of -€1200 euro (-4.7 %) in the Eurozone. However, in 2012, average US income has recovered to pre-crisis levels, whilst Eurozone’s is still 2.5% points below.
Real per capita GDP
Part of the reason for this is that the divergence between EMU states is much greater than between states in the US. Southern Europe remains deep in recession, even if Germany and Northern Europe is growing. And the divergence between north and south in the Eurozone has not been narrowed under the euro. Between 2000 and 2012, real per capita income of the richest US state is five times that of the poorest state. In the Eurozone this ratio is 8.6 to 1. It’s the same with unemployment. The aggregated unemployment rate in the US has been declining since 2010, whilst it is still increasing in Europe. In 2012 the unemployment gap between the lowest (4.3% in Austria) and the highest (25% in Spain) rate skyrocketed.
When we look at the combined Eurozone PMIs, we see a recovery after what was a ‘double-dip’ recession (2009 and then 2012). But the recovery is very weak and may even have started to falter again.
That’s why the ECB is under pressure to do something, like cut interest rates further or introduce another round of credit injections, QE-style.
The EU Commission released its forecasts for the European economy this week. It cut its forecasts for growth for this year and next for most countries. The Commission said the Eurozone would expand by an anaemic 1.1% next year, down from a projected 1.2% forecast in the spring and 1.4% estimated at the start of the year. The biggest reductions in growth projections for 2014 were for France – down from a 1.1% estimate in the spring to just 0.9% in the new forecast and Spain, which went from a spring forecast of 0.9% to 0.5%. On the other hand, the EU Commission reckoned that Greece would come out of its six-year depression next year and grow 0.6% and 2.9% in 2015. That’s after a reduction in real GDP from 2008 close to 30%. Similarly, Portugal is expected to grow 0.8% in 2014 after shrinking in four of the last five years.
The recession in the Eurozone, namely a contraction in real GDP, has made fiscal austerity programmes self-defeating. As the denominator for fiscal deficit or debt to GDP has shrunk, the ratios have risen, despite huge cuts in government spending and higher taxes. France, which promised to get below the 3% budget deficit to GDP target set by the Eurozone leaders, is forecast to hit 3.7% in 2015 while Spain, which has been granted two separate delays in its timetable to hit the target, is projected to see its deficit rise from 5.9% of GDP in 2014 to 6.6% in 2015! Overall, the Eurozone sovereign debt ratio will barely budge over the forecast period, hitting another all-time high of 95.9% of GDP next year.
More important for labour, the EU Commission sees little improvement in the unemployment rate in the region. It is expected to reach an all-time high of 12.2% next year and drop only slightly to 11.8% in 2015. A quarter of the workforce in both Spain and Greece will remain without jobs through 2015. Portugal will continue to hover around 17.5%.
It’s one thing to say that austerity is not working to meet the fiscal targets because Eurozone economies are contracting, or not expanding enough. It is another thing to say that the Eurozone recession was caused by austerity, as the Keynesians argue. I have presented a lot of evidence in this blog to show that austerity is not the cause of the global slump or even the reason for the failure to recover (see https://thenextrecession.wordpress.com/2013/01/13/multiplying-multipliers/). And here is is some more evidence from a recent paper (http://www.voxeu.org/article/what-s-wrong-europe).
The figure below shows that there is no correlation between the severity of fiscal austerity and per capita real GDP growth in the Eurozone. Greece and Ireland have applied the severest measures of fiscal austerity since 2012. In Greece, on the bottom right of the graph, GDP per capita fell by nearly 20 percentage points during the period, whilst the budget improved by about 5.6 points of GDP. In contrast, in Ireland, to the centre right in the graph, per capita income has remained largely unchanged despite a tightening of over 6% of GDP.
Fiscal adjustment and per capita GDP in the Eurozone
See my previous posts on the real reasons for the long depression in Greece and the relatively quicker recovery in Ireland (https://thenextrecession.wordpress.com/2013/03/27/profitability-the-euro-crisis-and-icelandic-myths/).
That brings me to the UK. Suddenly we are told that the UK is booming or is in recovery mode. Activity in the UK’s construction industry grew last month at its fastest pace for just over six years, offering more evidence of a recovery in the housing market. The UK construction PMI registered 59.4. This is the highest level since September 2007 at the beginning of the crisis. It was the sixth consecutive month that construction activity had grown.
Also, the manufacturing PMI grew for the seventh month in a row in October, though at a slightly slower pace than in recent months. The sub index for new orders rose at a rate close to the 19-year peak. And most important, activity in the UK’s dominant services sector rose at the fastest pace in more than 16 years in October. The services PMI hit 62.5 in October, up from 60.3 last month and the sharpest rise in activity since May 1997. The sub-index for employment showed the sector added jobs at the fastest pace in 16 years. The reading for new orders hit its highest level since the series began in July 1996, suggesting activity will continue to rise in the months ahead. The reading for the services sector, which makes up more than three-quarters of the UK economy, has been above the crucial 50 figure that marks an expansion in activity since the beginning of 2013.
So is it booming Britain? Well, let’s remember that PMIs are just surveys of business sentiment about activity and not measures of actual activity. Indeed, up to now, figures for manufacturing output have been falling while the PMI was rising! Just this morning, industrial production data were released for September showing a a rise of 0.9%, and 0.6% for the third quarter of 2013 over the second quarter. Manufacturing output for September also went up by 1.2% after August’s fall of 1.2%. Sounds better, but when we look at the graph below that shows the level of production, we can see that production is still below levels of two years ago and little better than in 2010 and some 10-15% below the level at the beginning of the Great Recession. That puts the ‘boom’ in context.
After a 25% depreciation of sterling, Britain’s current account deficit has barely improved. British exporters have performed far worse than their counterparts in Ireland, Spain and Portugal. For example, just today, BAE Systems (the military hardware producer) is to cut 1,775 jobs at its yards in Scotland and England and end shipbuilding altogether at Portsmouth in southern England. BAE Systems said it had made the cuts because of a “significant” drop in demand.
But this is the producer goods sector of the economy. Surely, what matters in the UK is its powerful services sector: business services, finance, property services, creative industries. Aren’t they starting to boom? After all, the services sector has now returned to its pre-crisis level.
Well, remember again that the PMIs merely suggest expansion from a level. The UK economy was hardly growing at all at the beginning of this year. This pick-up in expansion means that it might achieve real GDP growth of about 1.2% for this year – hardly a boom. Of course, the argument is that it will now accelerate through 2014 and 2015, indeed at a faster rate of growth than anywhere else in the G7, according to the EU Commission forecasts, even if that is still no more than a 2%-plus pace. Is that going to happen?
There is little sign of any ‘balanced growth’: it’s all in consumer spending and house prices, not in investment or exports; it’s all around London and the south-east and not in the regions. As George Buckley, an economist at Deutsche Bank, points out, up until this point the UK economy has enjoyed a lot of outside help. “You’ve got rates at a 300-year low, you’ve got QE worth almost 25% of GDP, you have the Funding for Lending Scheme . . . [and] the Help to Buy schemes one and two. All of that is a lot of support, and you think to yourself, is that sustainable?” Can rising consumption, based on low interest rates, rising house prices and central bank and government credit trigger an eventual boom in investment and output?
Well, it never has for long in a capitalist economy, which depends on rising profitability and investment – something that I have shown before is not evident in the UK. Profitability in the capitalist sector remains at lows, investment is at lows too and productivity growth is non-existent, as employers use temporary and part-time labour at low wages (zero-hours contracts etc) – see my post, https://thenextrecession.wordpress.com/2013/06/13/uk-economy-uncharted-territory/.
In an excellent series of articles (http://socialisteconomicbulletin.blogspot.co.uk/), Michael Burke has shown exactly how a slump in investment has been the main reason for the failure of the UK economy to recover. The UK government’s policies of austerity have played their role precisely because they have been mainly aimed at reducing government investment. Unless long-term productive investment is restored, modern capitalist economies will not recover, however much extra money is injected or extra government spending takes place.
Average real incomes are still falling. Most British households are not experiencing a boom, even if the top 1% in London is having a great time. At best, real GDP growth will rise just above 1% this year and will be lucky to reach 2% in ensuing years. Is that a boom? – even if it is better than other advanced capitalist economies.