Where is the economic recovery?

The two major international economic agencies of the global capitalist economy continue to revise down their forecasts for economic growth in this year and next.

In an update to its forecasts made last May, the OECD announced that the “outlook had darkened for 2014 and 2015 for almost all the world’s large economies”.  The OECD revised down its forecasts for 2014 growth for all large economies except India.  It now expects growth of 2.1% in the US, 0.8% in the Eurozone and 0.9% for Japan, downward revisions in each economy between 0.3-0.5% points. The UK will be the leader among the advanced capitalist economies at 3.1%.  For 2015, the OECD continues to hope for a pick-up but even here it has again trimmed most of its forecasts. The US is forecast to grow 3.1%, down from the 3.5% forecast made last May, while the Eurozone and Japan are now expected to manage only 1.1%.

Real GDP

The OECD admitted that world GDP growth of just over 3% a year was well below pre-crisis rates, confirming that there has been no return to ‘normal’.  What is also interesting is that the so-called emerging economies are also slowing down.  According to the OECD, of the major ‘emerging economies’, China will still achieve 7.4% growth, although that is looking increasingly doubtful.  And Brazil will achieve only 0.3% growth this year.

And the IMF in a new report reckons out that average real GDP growth in the emerging economies (including China) declined from 7% during the pre-crisis period (2003-8) to 6% over the post-crisis period (2010-13) and will now slow to 5% over the next five years (2014-18). Growth rates have been lower than the pre-crisis average in more than 70% of emerging markets since 2012.

EM forecasts

Ironically, having called for wage restraint and fiscal austerity for several years since the end of the Great Recession in 2009, the OECD now says that “while [weakness in wages] helped contain job losses during the crisis and was necessary in some euro area countries in order to regain competitiveness, it is now holding back a stronger recovery in consumer spending.”  Productivity growth in the major economies is pathetic at around 1%, but even that is being eaten up by profits as real wages have been virtually flat since the end of the Great Recession.

Wages and productivity

So it’s no wonder financial markets have been booming while global growth has not.  This worries the OECD.  “Exuberant financial markets are “at odds” with growth in the real economy and “this highlights the possibility that risk is being mispriced and the attendant dangers of a sudden correction.”

The IMF, in a document prepared ahead of this weekend’s G2o meeting of finance ministers and central bank governors in Australia, said that growth in the first half of this year was weaker than it had predicted in April and is set to reduce its own forecasts.  The IMF warns that “the global recovery is on precarious footing, as rising geopolitical tensions and the prospect of tighter monetary policy in the US risk dampening the outlook for global growth.”

This contrasts with the optimistic talk coming out of the US and the UK from economists and government officials about economic recovery.  Britain’s faster growth rate still seems to me to be based on an imbalanced economy, led by booming house prices and financial markets, rather than a recovery in manufacturing, exports and productive investment that could raise productivity.

The latest official data on UK home prices show a spirally housing market, with average home prices in London hitting over £500,000 or $850,000!  Up to July, house prices were rising at 11.7% yoy, with London up 19%.

UK home prices

At the same time, while unemployment has been falling, real wages have been falling too.  Wage growth at just 0.7% yoy is still well below an inflation rate of just 1.7% yoy.  And real disposable income is probably contracting even more if taxes and benefits are taken into account.  This is not a recipe for sustained economic growth and a reckoning is likely to come.

UK real wages

The lack of any rise in the real incomes of average households is repeated in the US.  The US has suffered another year of stagnant incomes as the economic ‘recovery’ failed to translate into rising prosperity for average households.  Inflation-adjusted income for the median American household rose by just 0.3% in 2013, according to the Census Bureau and is no higher than a quarter of a century ago.

The well documented rising inequality gap since the mid-1990s was confirmed by the Census Bureau.  Since the 1990s, the top 5% of American households have increased their real incomes by 1.4% a year while middle-income households got only a 0.4% rise each year, or more than three times as fast.

US real incomes

And there has been a huge decline in household incomes for the bottom 20% who have seen a staggering 16% fall in real income which peaked way back in 1999!  Indeed, 60% of American households have seen a fall in real incomes of about 10% since 2000. And the biggest hit to incomes is with households with adults aged between 45-54, who should be getting their peak lifetime earnings and are having big spending for kids going to school etc.  Since 1999, household real incomes for this age bracket are down nearly 16%.

US age income

Even Federal Reserve Chairwoman Janet Yellen was forced to comment on this.  She admitted that the 2007-2009 recession had “left lasting scars on the poorest American families that have yet to heal more than five years” into the official economic recovery.

So if economists are expecting a sustained economic recovery based on increased consumer spending then they will be sadly disillusioned.  No wonder the OECD is worried.

Of course, capitalist production can recover through increase business investment that generates more employment.  But investment in the real economy and particularly in productive sectors remains in the doldrums globally, while corporate profit growth seems to have reached its limits in this cycle even in the US (see my post, https://thenextrecession.wordpress.com/2014/08/24/getting-out-of-a-jackson-hole/).  So that does not augur well for a pick-up in global growth in 2015.

2 thoughts on “Where is the economic recovery?

  1. Just one point about investment. How can you be sure that it is even possible to invest as much as before? For example, it looks like returns on investment on new technologies on high end microchip manufacturing is arriving at the physics limit, despite what Intel says, for example.

  2. Well Michael. all those things– decline in median household income, growing inequality, etc. have, as you point out, been going on for some time, during both expansion and contraction….which should make it painfully clear that “new investment” “more investment” any sort of investment is any sort of remedy to this particular congruence of the structural and cyclical movement of capital.

    The fact of the matter is that capital is not suffering from a lack of investment; no more than it suffers from a lack of production, but is what it is precisely because of accumulated investment, accumulated overproduction.

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