World economy still crawling

An important indicator of how the world economy is doing is the pace of increase in world trade.  In periods of expansion, the growth in the volume of world trade is much faster than the growth in world real GDP. That allows each capitalist economy to expand output through exports if domestic demand or profitability is insufficient.

In the 15 years from 1992 to the point of the Great Recession, average annual growth in world trade was nearly double that of average growth in world GDP (figures from IMF economic database). However, since the Great Recession, world trade growth has been about the same as real GDP growth. This means that the major economies are now unable to export their way out of the slump.

World trade and GDP

In the global slump of 2008-9, world trade fell at a 20% yoy rate and then initially recovered at a similar rate. But that jump back has quickly dissipated. In 2014, world trade has started weakly. In February, world trade actually contracted 0.7% compared to a rise of just 0.2% in January (figures from World Trade Monitor, CPB Netherlands Bureau for Economic Policy Analysis).

World trade growth

The key motor for global trade has been Asia, particularly China. However, Asian exports have declined for three straight months and, in February, Asia’s imports also fell. There has been a clear slowing in world trade growth from an average of 7% a year before the global slump to about half that rate now.

Average world trade growth

One of the features of 2013 was a pick-up in economic activity in the major developed capitalist economies in Europe and the UK, but that was accompanied by a slowdown in the major emerging economies, like China, Brazil and India.  And emerging economies now contribute nearly half of world annual output.

Since the start of 2014, the business activity indexes (called PMIs) suggest that growth in the developed economies has tapered off. Sure, as my last post showed, the UK economy has accelerated from stagnation in early 2013 and the Eurozone economies have also got off their knees, but the pace of that pick-up is waning. The graph below shows that the world economy is still growing (i.e. the activity index is over 50), but it is now decelerating, particularly in emerging economies (figures compiled by me from Markit PMI data).

World business activity

World trade is contracting and world economic activity seems to have peaked – not a great sign that the global crawl is over.

9 Responses to “World economy still crawling”

  1. Boffy Says:


    Interesting data once more. A further break down is even more interesting. According to WTO Datastream, between 1980-94, world trade rose from $4 tn to $6 tn., which is an average rise per year of 3%, between 94 and 2000 the average rise per year was 12.5%, and between 2000 – 2007 it was 15%!

    The current figure is then about the same as during the 1980’s. Its higher than 90-94 when world trade was flat. But, its significantly below 94-2000, and even more below the figure of the first part of the boom between 2000 and 2007.

    Still that figure of rapidly increasing trade between 94-2000, and the further acceleration of trade between 2000-2007, hardly fits the theory that 2008 was the culmination of some supposed long run fall in the rate of profit!

  2. Boffy Says:


    The 15% average rise per year was between 2002 and 2007.

  3. Jim Brash Says:

    Boffy, I’ve always assumed that the fall in the rate of profits and the rise or decrease in trade output only intersection and then run parallel, when the nations doing most of the importing have economies in a deflationary period.

    • Boffy Says:

      Hi Jim,

      I think in order to understand this you need to read the following. Capital II, Chapters 15 and 16. These explain how the rate of turnover increases the annual rate of surplus value, which is the basis of the long-term rise in the annual rate of profit. I’ve summarised Chapter 15 already on my blog in a series of posts, and I’m half way through summarising Chapter 16, in the same way. Its also necessary to read Capital III, Chapter 4, which sets out how the rate of turnover of capital impacts the annual rate of profit. I would also read Chapter 18, as well at the same time, because it develops the calculation of the general rate of profit, to take account of merchant capital, and explains the role of the turnover of merchants capital on profit margins and prices.

      Chapter 18 is also important because it illustrates some of the confusion over the term “Rate of Profit”. To get the background to that you also, unfortunately need to read Chapters 9 and 10 on the formation of an average or general rate of profit. The problem is that Marx effectively uses three different definitions of “Rate of Profit”. In Capital II, and in Capital III Chapter 4, Marx and Engels make a clear distinction between the rate of profit used in bourgeois calculations, which is to take the laid-out capital for the year – essentially the cost of production – and to measure the profit against this total. In essence, what you then get is a profit margin. This definition of the “Rate of Profit”, however, is definitely important, if you want to understand how many capitalist crises occur during periods of boom, and high rates and volumes of profit. That is set out by Marx in Capital III, Chapter 6, and in Chapter 15.

      The analysis here is that as productivity rises sharply due to technological innovation, the proportion of both wear and tear of fixed capital, and of variable-capital, and, therefore, of surplus value, declines as a proportion of the price of each commodity unit. However, because the same process means that the number of commodity units produced increases vastly as part of this process, the total mass of profits rises. The analysis of this process in relation to merchant capital in Chapter 18, is perhaps in some ways a clear explanation of this, even though the mechanics are different. As Marx points out there, for productive-capital, the more times it turns over the more surplus value it produces, and so the annual rate of profit rises. Merchant Capital can only share in the surplus value produced. So, the more times its capital turns over, the lower the profit margin it obtains. For example, if the average rate of profit is 10%, a merchants capital of £100 will make £10 in a year. If it buys commodities costing £100, and turns them over once during the year, it will sell them for £110. However, if it buys these commodities and sells them every 5 weeks, so they are turned over 10 times a year, it will sell the commodities for only £101, each time. In a year, it will have laid out £500 in capital, and sold commodities at a price of £510, making £10 profit. But, its rate of profit will be 10%, because it is calculated on the capital it advanced (£100), not the capital it laid out (£500). Marx points out that this has to be the case otherwise merchant capital would obtain a higher rate of profit than productive-capital.

      But, the reason this definition of “Rate of profit” as profit margin is important, is precisely because the lower the profit margin – especially as its associated with periods of boom and high levels of profits – is because the margin for it to be wiped out is that much smaller. A change in consumer tastes, or a change in input prices can quickly mean that each units selling price is below its cost of production. In Capital III, Chapter 6 and in Chapter 15, this is precisely the situation that Marx describes. In Chapter 6, he details the situation in England during the period of boom from around 1843 onwards. Former workers etc. were setting up their own firms and so on, as the rate and mass of profit rose – this is what Marx means by the plethora of small capital. When new inventions came in that could process much more cotton, the demand for cotton rose sharply pushing up the price of cotton, so that its price could not be passed on in to final products. The amount of surplus value produced by workers continued to rise, but it was squeezed, as firms had to bear the cost of the rising cotton price or face being unable to sell their goods. A further description of these conditions is given in Chapter 25 detailing the effects of the financial crisis of 1847.

      Its this same background of booming conditions and high rates and masses of profits that cause the demand for inputs including labour to rise sharply that squeezes profits, that leads to a crisis as described in Chapter 15. Marx makes that clear, when he writes,

      “In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.”

      In other words, the demand for labour has risen so much under such conditions that the rate of surplus value has fallen, because wages have been pushed up. In conditions where the profit margin was already very narrow, because of the extent to which production had been expanded, this threatens to make it impossible to sell additional output profitably, because to increase demand, it would be necessary to reduce market prices further, which would take them below the cost of production. Demand could be expanded if more workers were employed and had wages to spend, but this would simply mean the demand for labour rose further, pushing wages even higher, and the rate of surplus value lower.

      “Over-production of capital is never anything more than over-production of means of production — of means of labour and necessities of life — which may serve as capital, i.e., may serve to exploit labour at a given degree of exploitation; a fall in the intensity of exploitation below a certain point, however, calls forth disturbances, and stoppages in the capitalist production process, crises, and destruction of capital.”

      In setting out the background to this kind of crisis caused by a boom, high profits, over expansion on the back of those profits and a crisis caused by sharply rising input costs that cannot be passed on, in conditions of narrow profit margins. This definition of “Rate of profit” is useful. In describing this Rate of Profit, earlier, Marx for reasons of ease of explication makes the simplifying assumption of a single turnover of the capital. But, both he and Engels point out the danger of making that assumption, because in reality the circulating capital never does turn over just once during a year, and the same factors that cause the “Rate of profit” to fall, also cause the mass of profit to rise, and the annual rate of profit to rise.

      That is why during those periods of boom, when the mass of profit and annual rate of profit is rising, the crises of overproduction arise as temporary crises, which resolve the short term contradictions, but then allow the boom to continue on the basis of the underlying high level of profit. Its why Marx says,

      “A distinction must he made here. When Adam Smith explains the fall in the rate of profit from an over-abundance of capital, an accumulation of capital, he is speaking of a permanent effect and this is wrong. As against this, the transitory over-abundance of capital, over-production and crises are something different. Permanent crises do not exist.”

      In fact, when you read Chapter 18, on Merchant Capital, its clear that although Marx’s examples earlier are based on the former definition of “Rate of profit”, i.e. profit margin, he really intends the “Annual Rate of profit”, to be the basis of the calculation of the general rate of profit, and of Prices of Production. So, for example, out of the blue he introduces a new term that nowhere previously has been defined, which is the “general annual rate of profit”, which appears to be the definition of the general rate of profit determined earlier, but taking into account the rate of turnover of capital. That has to be the case, because in determining the effect of merchant capital on the calculation of the general rate of profit, its rate of turnover is take into account.

      So, its quite clear as Marx demonstrates here that the “Rate of profit”, (profit margin) will be declining during periods of boom, alongside an increase in the mass of profit, and the annual rate of profit. These conditions make crises of overproduction likely, precisely because of the tight profit margins they create in conditions of stretched markets. But, precisely because the underlying conditions are ones where the real rate of profit (general annual rate of profit) is rising, and along with it, the mass of profit, the crisis of overproduction is merely a temporary phenomena that resolves the contradictions that have built up, and allows the boom to continue.
      When the general annual rate of profit itself starts to slow down significantly, or even to fall, then a different set of conditions set in. Instead of boom, over exuberance, and overproduction of capital, capital begins to slow down accumulation, and a period of stagnation sets in. But stagnation is not overproduction. It is the opposite. In a crisis of overproduction, capital is created that cannot be validated and so is destroyed. In a period of stagnation the capital is not created in the first place to get destroyed. It builds up instead as money hoards, that may be used in speculation as was seen in the 1980’s and 90’s, or may simply be built up by capital waiting for the appropriate opportunity for productive investment.
      The massive growth in the first ten years of this century, of which the rising trend of growth in trade is a reflection, is an indication of a condition of high rates and volumes of profit, not of stagnation.

      • Boffy Says:

        The situation described in paragraph 4 above of a boom with high levels and rates of profit, in which workers continue to produce large amounts of surplus value, but which is squeezed by low profit margins, in stretched markets is outlined by Marx in Chapter 15, where he writes,

        “The creation of this surplus-value makes up the direct process of production, which, as we have said, has no other limits but those mentioned above. As soon as all the surplus-labour it was possible to squeeze out has been embodied in commodities, surplus-value has been produced. But this production of surplus-value completes but the first act of the capitalist process of production — the direct production process. Capital has absorbed so and so much unpaid labour. With the development of the process, which expresses itself in a drop in the rate of profit, the mass of surplus-value thus produced swells to immense dimensions. Now comes the second act of the process. The entire mass of commodities, i.e. , the total product, including the portion which replaces the constant and variable capital, and that representing surplus-value, must be sold. If this is not done, or done only in part, or only at prices below the prices of production, the labourer has been indeed exploited, but his exploitation is not realised as such for the capitalist, and this can be bound up with a total or partial failure to realise the surplus-value pressed out of him, indeed even with the partial or total loss of the capital. The conditions of direct exploitation, and those of realising it, are not identical. They diverge not only in place and time, but also logically. The first are only limited by the productive power of society, the latter by the proportional relation of the various branches of production and the consumer power of society. But this last-named is not determined either by the absolute productive power, or by the absolute consumer power, but by the consumer power based on antagonistic conditions of distribution, which reduce the consumption of the bulk of society to a minimum varying within more or less narrow limits. It is furthermore restricted by the tendency to accumulate, the drive to expand capital and produce surplus-value on an extended scale. This is law for capitalist production, imposed by incessant revolutions in the methods of production themselves, by the depreciation of existing capital always bound up with them, by the general competitive struggle and the need to improve production and expand its scale merely as a means of self-preservation and under penalty of ruin. The market must, therefore, be continually extended, so that its interrelations and the conditions regulating them assume more and more the form of a natural law working independently of the producer, and become ever more uncontrollable. This internal contradiction seeks to resolve itself through expansion of the outlying field of production. But the more productiveness develops, the more it finds itself at variance with the narrow basis on which the conditions of consumption rest.”

    • Boffy Says:

      Incidentally, in relation to the build up of money hoards and speculation consider the following. Although, in the last few years there has been an unprecedented amount of money printing fuelling speculation, the DOW Jones has risen by 60% in the 14 years since 2000. By contrast in the 18 years, between 1982 and 2000, it rose by 1,000%!

      If you look at other indices of speculation in a number of economies, for example in relation to property prices, you will see that the real speculation and blowing up of the bubble occurred in the 1980’s, particularly late 1980’s and 90’s.

      Despite, currently low levels of capital spending by, for example, US corporations, the profits of those corporations as indicated by the last quarters earnings figures continue to rise, though not by anything like enough to justify current stock market valuations.

  4. Boffy Says:


    In Para 3, it should obviously be that if the £100 capital is turned over 10 times during the year, the laid out capital is £1,000, not £500. The profit margin per unit is 1%, and the general annual rate of profit remains 10%.

  5. stevetownsend164 Says:

    Interesting stuff. I’m also blogging about the economy at

  6. Jim Brash Says:

    Thanx Boffy for the suggested readings.

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