The myth of the return to normal

The latest economic data for the main capitalist economies is not encouraging for the optimists that the world economy is set to resume normal service.

Last week, we had the first estimate for US GDP for the period April to June (see my post, ). The US economy has been the better-performing top economy over the last few years. But even here, real GDP growth was just 2% yoy, well below the long-term average since 1946 of 3.3% a year.

The recovery has been weak.  In the five years after the Great Depression troughed in 1933, US nominal GDP (that’s before inflation is deducted) rose 52%. In the five years since the end of the Great Recession in mid-2009, US nominal GDP has risen only 18%.  The gap between US nominal GDP and where it would have been without the Great Recession remains wide – and even getting wider.

US nominal GDP

Indeed, US economic growth appears to be in secular decline. In the 1980s and 1990s, the US economy generated nearly 40 quarters where GDP was 4% or higher on an annualised quarter or quarter basis (not yoy). But there have been just seven of these “hypergrowth” quarters since 2000, if you include the last quarter. But that will be revised down when the huge rise in stockpiles of goods that were included in the 4% quarterly figure are reduced. So US real GDP growth was less than 2% yoy last quarter.  And yesterday, figures for American spending in shops came out and they were not pretty either. Retail sales were flat in July and the yoy rate slowed from 4.3% in June to 3.7% in July.

Things are far worse elsewhere. The data from the Eurozone are appalling. Industrial production has been shrinking for some time, down 1.1% in May over April and another 0.3% down in June over May. Today, the figures for real GDP growth for April to June came out – and there was little or no growth. The French economy was flat for the whole of the first half of 2014, while business investment fell 0.8% in the latest quarter. The French government has accordingly reduced its previously optimistic forecast for real GDP growth of 1.1% for this year to 0.5%. France may be lucky to see even that.

Even more worrying, the key economy in the area, Germany, contracted in the second quarter, falling 0.2% from April to June. If you put this together with a contraction in Italy already reported and growth of just 0.5-0.6% in the Netherlands, Spain and Portugal and yet another contraction in Greece, the whole Eurozone area failed to grow at all in the last quarter and rose just 0.7% over the last 12 months.

Japan too is a very poor shape, refuting the hopes and talk that Abenomics could turn the Japanese economy around (see my post, The huge hike in sales tax imposed by the Abe government in April, brought in to try and reduce the Japanese government’s large budget deficits and debt, has led to a collapse in consumer spending much greater than expected. In Q2’14, Japan’s GDP fell at an annualised rate of 6.8%, the biggest fall since the 2011 earthquake and tsunami. Japanese households cut their spending by 18.7% on an annualised basis! And businesses cut investment by 9.7% annualised. Indeed, investment in new machinery is down 3% from this time last year. Housing investment fell by 35%! And this GDP figure included a 4% rise in the stockpile of goods. If this is excluded, then the contraction was even worse.

Japan GDP

Now supposedly, the UK economy is the shining star in these clouds of doom elsewhere. I have had already cast some doubt about the nature and sustainability of the apparent pick-up in economic growth in the British economy (see my posts, and

At his press conference at the Bank of England yesterday on the release of the BoE’s quarterly inflation report, our overpaid governor Mark Carney raised his growth forecast for 2014 from 3.4% to 3.5%. A positive boom! But even the BoE recognised that this could be a one-off. Its own forecast for growth in future years is lower.  Carney claimed that the ‘recovery was broad-based’, but this is difficult to justify, when we see that GDP per person is still well below the 2007 peak, that manufacturing output is even further down and above all, average real wages continue to decline.

Indeed, nominal pay for employees (that’s before the impact of inflation and taxes) fell in the period April to June by 0.2% (black line in graph below). And yet inflation is rising by 1.9% yoy (yellow line in graph below). So wages are being outstripped by prices in the shops, in utilities and other daily expenses. Average real incomes have been falling since the Great Recession and there is little sign of any ‘recovery’ for most British households. Indeed, the Bank of England actually reduced its forecast for wage growth this year to just 1.25% from a previous 2.5%. Real wages will continue to fall.

UK real wages

On the other hand the BoE expects the official unemployment rate to fall further towards 5.5%, but this rate would be still higher than before the Great Recession – that will be the new normal for jobs in the UK.

UK unemployment

In previous posts, I have discussed why the UK unemployment has fallen even though economic growth has been weak since the Great Recession. But the key consequence of this has been the abysmal state of productivity per worker in the UK, which remains well below pre-crisis levels. More people in Britain have been getting jobs, but nearly half of these are in self-employment where incomes are generally lower than in full-time employment and where productivity (value per worker) is poor, even though many self-employed work long hours 9for little reward). Large corporations are flush with cash but unwilling to invest in new technology or R&D that could boost productivity.

UK productivity

Flat productivity growth plus even employment growth of 1% a year (very strong, but achieved in the six years before the Great Recession), means long-term real GDP growth of just 1% a year – and that’s assuming no new recessions or slumps. No return to normal there.

10 thoughts on “The myth of the return to normal

  1. Michael,

    “Indeed, US economic growth appears to be in secular decline.”

    I agree, and surely that is the problem with comparing US growth in the 1930’s, and now. In the 1930’s, the US was the main rising economic power. It would be interesting to compare on that basis the extent to which Britain recovered in the 1930’s, compared to how the US has recovered today. I don’t know if you have the data on that, but it would be a useful comparison.

    Similarly, a comparison with how the US recovered in the 1930’s, with how today’s rising power, China, has recovered today would be interesting. But, maybe in relation we should bear in mind the Chinese thoughts on how successful the Great French Revolution was – “Its still too soon to tell!”

    We might need to wait another 10 years, before we know the full story, before we can properly compare with the 1930’s.

  2. Michael,

    I’ve just had a look at UK GDP in the 1930’s. In 1930, according to UKPublicspending, GDP was £45.87 billion, and in 1940 £47.997 billion. That is an increase over the ten years of just 4.64%.

    In 1933 GDP was £46.495 billion, and in 1938, £47.563 billion.

    That is a rise in the five years after the end of the depression of just 2.30% in total.

    That makes the current US performance of 18% look pretty good. perhaps the real lesson here is that former global economic powers perform particularly badly in periods of recovery, because rising economic powers are better able to take advantage of the situation.

    Perhaps that is why the rapidly developing new powerhouse is in Africa.

    1. Just a comment on your UK data. The Bank of England, which provides three centuries of data on the UK,…/threecenturiesofdata.xls
      According to the BoE, UK nominal GDP in 1933 was £42.93bn and £54.95bn in 1938, a rise of 28%. That’s a lot different from what your data source tells you.

      I had compared US nominal GDP in my post. The real GDP rise in those five years, according to the BoE, was 20% for the UK, or about 4% a year. In the five years since the mid-2009 trough, UK real GDP has risen just 8%, or about 1.6% a year. So the story I painted about the very weak recovery in the US even compared to the recovery from the Great Crash in the 1930s seems to be matched for the UK too.

      Actually the UK’s trajectory in the inter-war period was different from the US. The real depression for the UK was in the 1920s, when real GDP was still some 5% lower in 1926 than in 1919, thus seven years later. In the 16 years to 1937, when the post-1929 Crash recovery ended in the UK and the US, the UK’s real GDP was just 25% higher than in 1919, or an annual average rise of just 1.5% a year, about the same average as the recovery now.

  3. Michael,

    Thanks for that. The data source was I thought the number seemed low, but was only looking quickly. I wondered whether it was a difference between nominal and constant £’s, but it didn’t seem to be.

    I agree about the real depression in the Uk being in the 1920’s rather than 30’s, which coincides with Kondratiev’s point that the Us was about 10 years out of synch with the global long wave.

    But, on that basis, the fact of UK GDP still being lower in 1926 compared to 1919, let alone the further figure of just a 1.5% average rate of growth between 1919 and 1937, brings us back to my actual point.

    That is that at that time the UK was the world’s global hegemon, but in clear decline. That is it occupied at that time the same position that the US occupies today. So comparing how the UK fared in its recovery at that time, with how the US fares today is the real comparison to make, not how the US – as the new dynamic power in the 1920’s/30’s – compares with its own performance today, or how the UK compares then with now.

    Similarly, we might compare the US recovery performance in the five years after 1933, or the UK performance in the 5 years after 1919, or whatever, with the Chinese recovery performance since 2009.

  4. I’ve had another look at the UKpublicspending data, and it seems to have a glitch, because the figures shown are actually for population! The column for GDP seems to be missing. But it does have a link back to the Mitchell data, that the BoE also seem to use. It has slightly different figures to the BoE data, but negligible.

  5. Well, at least productivity has grown for the capitalist class and real wages have fallen. That should help ‘the economy’ with the tendency of the rate of profit to fall and all.

    The working class seems well diverted with nationalism and xenophobia, not helped much of course by the rise of political Islam’s Sunni brand Wahabi barbarism in the Middle East.

  6. Reblogged this on Socialist Fight and commented:
    The falling rate of profit is, and has been for many decades, truely global and its global effects can only be seen in this type of study. TYhis is capitalism’s future; Imperikalist wars without end. If you want to find the cause wars in Libya, Syria, Iraq, Ukraine and WWIII this is it.

    1. So, if the rate of profit has been falling for decades as you claim, how then do you explain the massive increase in capital accumulation that has occurred during that period? Since the 1980’s the global working class has doubled, and increased by more than 30% just since 2000. Global GDP has almost doubled since 2000, and global fixed capital formation has doubled.

      As Marx tells us that capital is accumulated surplus value, it would be interesting to know how this massive accumulation of capital has arisen whilst at the same time the rate of profit has been falling!

      You seem to have capital simply appearing out of thin air!

      1. Our block quoter of Marx writes: “So, if the rate of profit has been falling for decades as you claim, how then do you explain the massive increase in capital accumulation that has occurred during that period?”

        Anyone who has actually read Marx, rather then simply look for quotes that fit whatever agenda the quoter has at any particular time, could point out that of course the two things, actually RELATIONS, are not mutually exclusive, in fact can and do accompany each other at certain times, since both are facets of the same social relation, the same social organization of labor called capital.

        Then the block quoter continues: “As Marx tells us that capital is accumulated surplus value, it would be interesting to know how this massive accumulation of capital has arisen whilst at the same time the rate of profit has been falling!”

        Apparently, not only does he not read Marx, he doesn’t even read his own posts, or remember them, because he is the one who has pointed out time and time again that the declining rate of profit is accompanied by the increasing mass of profit.

        Details, details, details. So petty, aren’t they? So important.

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