World economy: getting back to trend?

The latest high frequency indicators of economic activity in the major economies suggest that global economic growth picked up a little in the summer. Based on my measures of the so-called purchasing managers indexes (PMIs), business activity in both the advanced capitalist economies and the so-called emerging economies is up from a weaker first quarter.

Business activity indexes

This would suggest a global annualised growth rate of about 3.0-3.5% for 2014. That’s better than the first quarter by some way, but still below the rate achieved in the recovery from the Great Recession in 2010.

Global PMI

And, as has been documented in this blog and in many other places, the economic recovery from the Great Recession has been the weakest of all recoveries from slumps since the second world war. Since the end of the Great Recession, world industrial production growth has averaged only 40% of the rate achieved before the Great Recession and only 60% of the long-term average. The productive sectors of world capitalism are crawling along.

And that conclusion also applies to the US, the economy that has achieved the best recovery of the all major capitalist economies (G7) since 2009. The US GDP is still 5% pts below its ‘full potential’, even though it has been the US economy that has led the way in this ‘recovery’. The last set of US GDP and employment figures, as I outlined in a previous post (https://thenextrecession.wordpress.com/2014/08/29/the-us-recovery-the-long-depression-and-pax-americana/), suggest that the US economy is expanding at little more than about 2% a year, well below the post-war average of 3.3% and even more behind the pre-crisis rate.

However, there is more talk among mainstream economists that the US, at least, is now on a path of sustainable ‘normal’ growth, something I questioned in a recent post
(https://thenextrecession.wordpress.com/2014/08/14/the-myth-of-the-return-to-normal/).

Gavyn Davies, former chief economist at Goldman Sachs and now a columnist for the FT, reckons that the US recovery now looks sustainable. Davies recognises that global financial crashes and slumps combine to limit and delay economic recovery, but: “such recoveries are slower than normal in their early phases, and they therefore take much longer to bump into supply constraints. On average, such shocks are followed by economic recoveries that last for 8-9 years, as compared to 5 years for the present US recovery. At about the current stage of the recovery, they actually tend to speed up a bit.” http://blogs.ft.com/gavyndavies/. And he quotes the work of his old employer, Goldman Sachs, which shows that the US economy could at last be about to head back to the trend growth rate of the past (see graph below).

Wolrd recovery cycle

The evidence of the weekly US economic indicator ECRI would also suggest that the US economy might be reaching a lift-off point.

ECRI

But these activity surveys are the only evidence that I can find for Davies’ assertion. US business investment shows little sign of a significant pick-up and corporate profits have actually stopped rising.

US business investment level

Employment growth remains lacklustre and real wages for average Americans are flat at best. Indeed, the latest Federal Reserve survey of household finances shows that median family incomes in the US have dropped so much in real terms since the Great Recession that they are now no higher than they were 16 years ago!
(http://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf).

US median family income

So a Keynesian-style demand boost for the US economy from household spending looks unlikely. If consumption and business investment remain in the doldrums, so will the US economy.

The United Nations Commission for Trade and Development (UNCTAD) just released its annual report on the global economy. UNCTAD remains gloomy about a return to normal (http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=981). UNCTAD concludes “six years after the onset of the global economic and financial crisis, the world economy has not yet established a new sustainable growth regime. With an expected growth between 2.5 and 3 per cent in 2014, the recovery of global output remains weak.” It points out that “international trade remains lacklustre. Merchandise trade grew at close to 2 per cent in volume in 2012−2013 and the first few months of 2014, which is below the growth of global output. Trade in services increased somewhat faster, at around 5 per cent in 2013, without significantly changing the overall picture. This lack of dynamism contrasts sharply with the two decades preceding the crisis, when global trade in goods and services expanded more than twice as fast as global output (at annual averages of 6.8 per cent and 3per cent respectively).

UNCTAD, being an institution that is somewhat ‘off message’ compared to the IMF and the World Bank, calls for coordinated global action by governments to reverse ‘market liberalism’, reduce inequality and follow the prescriptions of Pope Francis (see my post, https://thenextrecession.wordpress.com/2013/11/28/ayn-rand-pope-francis-and-the-philosophy-of-greed/)!

Don’t hold your breath.

One Response to “World economy: getting back to trend?”

  1. sartesian Says:

    What was it the Shirelles sang in “This Is Dedicated To The One I Love”? The darkest hour is just before dawn? The bourgeoisie have a reverse twist on this, more along the lines of that light at the end of the tunnel is a locomotive coming your way.

    IMO, overproduction is clearly taking hold again, and the up-move in 2014 is being stalked by declines in prices for iron ore, oil, etc.

    Going to be a very interesting 4Q, with the EU sunk in the funk; the BRICs falling; etc.

    And “interesting” means more bloodletting. Comment in the financial press the other day, remarking that despite the wars raging in the Middle East, the price of oil has not reacted as if supplies were threatened. You know what that means for capital; time to make a horrible situation worse

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