The next recession

Back last summer, there was growing concern that the world economy, already making the weakest recovery from the deepest slump in production and investment since 1945, was slowing down.

Indeed, it now seemed that the ugly thought of another recession, as economists call a contraction in production, incomes and spending, was a serious possibility within a few years or less.  The IMF raised the probability of recession in the so-called ‘emerging economies’ of Latin America, ex-China Asia and the rest of the world to near 50%.

recession probability

The slowdown in emerging economies has been led by the significant slowdown in China’s powerhouse economy, from double-digit real GDP growth just a few years ago to less than 7% now on the official figures (many ‘experts’ reckon real GDP growth is much lower than that). As China slowed, its inexorable demand for energy and other raw materials and other export goods from elsewhere dropped.  Other large emerging economies plummeted into recession (Brazil, Russia, South Africa). 

Indeed, as I have previously pointed out, before the crisis, world trade tended to grow around  twice as quickly as world GDP, but since 2012 trade growth has simply matched that of GDP.

World trade trend

 “The global economy is uncomfortably close to the edge,” said David Stockton, senior fellow at the right-wing mainstream Peterson Institute for International Economics.  “Economics isn’t rocket science, and even rockets frequently land in the wrong place or explode in mid-air,” wrote Willem Buiter, chief global economist at Citigroup, who has assigned a 55% chance of a moderate to severe global contraction next year.

This worry even led the US Federal Reserve to delay its planned and much anticipated hike in its base interest rate that affects the cost of borrowing dollars in the US and globally.  If the emerging economies were slumping, it would be the wrong time to dampen household spending and business investment.

However, the optimists among mainstream economics have dismissed these prognoses.  Emerging economies may be slowing down and some may have contracted outright, but the major advanced economies were doing okay and Europe was actually picking up a little from its depression of 2010-13.  So the global economic recession was not going to happen.

Well, now we are getting data for real economic growth for the third quarter of 2015 (June to September) from the major advanced economies – and it is not great news for the optimistic scenario.  The slowdown in economic activity experienced in China and in most emerging economies is now being repeated in the advanced economies.

The US economy is the largest in the world and up to now has been recovering relatively better than the other major economies within Europe and Japan.  In Q3, the US economy did expand but only at a 1.5% annualised pace, down from 3.9% in the second quarter. That meant that the US economy expanded in real terms over the last 12 months by just 2%, down from 2.7% in Q2.

US real GDP

This 2% growth rate has become the norm for the US since the end of Great Recession. There seems no prospect of a return to previous trend growth and that means there has been a permanent loss of value for the American people from the Great Recession.

US trend GDP

In Q3, US business investment slowed to its lowest yoy rate for over two years.  Business investment grew more slowly, up only at an annual rate of 2.1% compared with 4.1% in Q2. Investment in new plant actually dropped 4% while investment in software and such rose at the slowest pace since 2013.  And, as a share of GDP, investment remains below pre-crash levels.

US bus inv

Now, some have been arguing that business investment in things like plant, machinery and equipment is less necessary given the new ‘disruptive technologies’ of the internet of things, software, algorithms etc that do not require tangible structures.  So investment is taking place but it now costs way less and is not really captured in the data.

For example, McKinsey argues that the “the US economy has shifted toward intellectual property–based businesses. Medical-device, pharmaceutical, and technology companies increased their share of corporate profits to 32 percent in 2014, from 13 percent in 1989. Since a company’s rate of growth and returns on capital determine how much it needs to invest, these and other high-return enterprises can invest less capital and still achieve the same profit growth as companies with lower returns”.  McKinsey- US – Are share buybacks jeopardizing future growth

Or put it another way: “while capital spending has outpaced GDP growth by a small amount, investments in intellectual property— research and development—have increased much faster. In inflation-adjusted terms, investments in intellectual property have grown at more than double the rate of GDP growth, 5.4 percent year versus 2.4 percent. In 2014, these investments amounted to $690 billion.” So McKinsey concludes: “Certainly, some individual companies are probably spending too little on growth—just as others spend too much. But in aggregate, it’s hard to make a broad case for underinvestment”.

No doubt there is some truth in this.  But even if investment is increasingly in ‘intellectual property’ and not in factories and robots (really?), even in the former, there appears to have been a slowdown in the US.  Software investment is no longer outstripping investment in hardware.

software

US household spending did rise 3.2% in the quarter.  The tax intake for personal incomes fell, so disposable personal income increased 4.8% compared with 3.4% in Q2.  And with headline inflation near zero, real disposable personal income rose. That’s why household spending was up. But while it’s true that the US unemployment rate continues to fall, the pace of that improvement is waning.

Us job growth

The slowdown in US economic growth was also repeated in the UK, the only other major advanced economy that has experienced 2%-plus real GDP growth in the last year or so.  Real GDP rose just 0.5% in the third quarter of 2015, so that real GDP is now 2.3% higher than this time last year, down from a growth rate of 2.4% yoy in Q2.  Although UK real GDP is now 6.4% higher than its peak at the beginning of 2008 (before the Great Recession), nearly seven years ago, once the population increase (up 3m, partly from net immigration) is taken into account, real GDP per head has only just reached the 2008 level.

As in the US, UK growth was almost totally confined to ‘services’. Manufacturing and construction actually contracted. Within services, the main contribution came from property and finance, the ‘unproductive’ sectors of the economy.

Back in 2008, manufacturing was nearly 10% of GDP and real estate was 8.5%. Now manufacturing is 8.6% and real estate is 10.4%. Real estate has jumped over 20% since 2008 while manufacturing has contracted nearly 7%. Indeed, UK heavy industry like steel is being crushed by falling commodity prices, weak economic growth in Europe and the dumping of Chinese steel in world markets . That’s the nature of UK economic growth: unproductive and credit-fuelled.

As for the other G7 economies, the slowdown is even worse.  Canada is in a ‘technical recession’, two consecutive quarters of contraction in real GDP.

canada gdp

Japan is teetering on a recession.  And just today, the Bank of Japan (BoJ) lowered its forecast for real economic growth out to 2018. The BoJ now sees growth in the year to April 2016 at just 1.2%, down from 1.7%. For the year to March 2017, the BoJ now expects growth of 1.4% down from a 1.5% forecast in July. And for the year to March 2018, the BoJ forecasts growth of only 0.3%!

The other G7 economies are in the Eurozone.  Germany has sustained a very modest growth rate in the last few years of about 1.0-1.5%; France has growth even less each year; and Italy has been stagnant (although it appears to be finally making a mild recovery in the couple of quarters).  We shall know more when the Q3 GDP figures come out next week.  But Germany is likely to record slower growth as exports to Asia and China have taken a tumble.

Spain has been the fastest-growing of the Eurozone economies in the last year or so, having suffered badly in the Great Recession with a housing collapse and a massive increase in unemployment.  But the ‘boom’ since 2013 appears to be over.  Today, the figures released for Q3 2015 real GDP growth showed a slowdown to 0.8% on the quarter compared with 1% in the previous quarter.  The year on year rate was up to 3.4% though compared to 3.1% in Q2.  But that could be it.

So expansion in the major advanced economies is slowing alongside the sharp drop in GDP growth in the emerging economies.  Indeed, Taiwan, a key Asian industrial economy, has just announced that its real GDP in Q3 fell by 1% from a year earlier, the first contraction in six years.

Since World War II, recessions have occurred at regular intervals, between 6-10 years.  The current expansion is more than six years old, beginning in July 2009.  Mainstream economics has signally failed to predict them.  For example, in the spring of 2001, the US economy faced weak growth abroad and the fallout of the dot-com bubble, but only 15% of economists surveyed that summer believed a downturn had begun.  Yet the economy was in the midst of a recession that lasted nine months.  As for the Great Recession, the failure of nearly all mainstream economists and major international institutions like the IMF and the OECD to see this major slump coming is well recorded. (The causes of the Great Recession).

The next recession will pose big problems for the economic policy makers of the major countries.  Easy monetary policy (zero interest rates, quantitative easing) has been virtually exhausted (apart from being pretty ineffective anyway in boosting the ‘real economy’ rather than stock markets and banks).  Keynesian-style government spending has been rejected or curbed up to now because public sector debt levels have been so high and corporate profitability has been so low.

There are those like Ben Bernanke, former Fed chief or Andy Haldane, current chief economist at the Bank of England, who argue that central banks saved the major economies from a Great Depression and there is even more that can be done in printing money for direct handouts to households or having negative interest rates to avoid a new slump.

And the Keynesians like Paul Krugman, Larry Summers, Simon Wren-Lewis and a host of others continue to push for more government spending and budget deficits to ‘pump-prime’ the economy.  But this is more likely to reduce profitability and investment of the capitalist sector than save it.

The next recession cannot be avoided and it is not far away.

11 Responses to “The next recession”

  1. colono Says:

    Hi!

    Should you find yourself out of topics to illuminate, an overview of China child policies and associated historical/societal developments, perhaps comparisons with Euro-Ameican contexts, would be greatly appreciated!

    /mp

  2. johnlewisgrantJohn Grant Says:

    If the recession is accompanied by, or perhaps even precipitated by, an adjustment in equity and real estate values to long term historical norms, the consequences could easily be much worse than 2008/9. U.S. employment participation rates have remained dismal throughout the so-called recovery. But, as bad as life has been for the American worker since 2008, the U.S. has yet to experience true “depression” levels of unemployment.

  3. ancillary6 Says:

    What other options do policymakers have, at this juncture? Negative interest rates sound absurd as anything beyond a stop-gap measure… but what else is there?

    That’s what’s most concerning about this whole affair. The people ostensibly in charge of keeping the global economy afloat are increasingly looking less like engineers and scientists and more like shamans burying goat skulls in a field to appease the angry god Capital.

  4. Boffy Says:

    Michael,

    Interesting data as always. You state.

    “But even if investment is increasingly in ‘intellectual property’ and not in factories and robots (really?), even in the former, there appears to have been a slowdown in the US. Software investment is no longer outstripping investment in hardware.”

    However, Marx never made the investment in fixed capital, be it factories, machines or now robots, or software the sole or even main aspect of capital accumulation. In fact, given that for Marx capital is a social relation between capital and wage labour, he sets out that it is actually the expansion of the working-class, which is the actual measure of that expansion.

    In the US, there has certainly been an expansion of the workforce, and that is true to an even greater extent in the global economy. Would you not expect that if the effectiveness of technology and fixed capital were rising strongly that the mass and value of fixed capital would be being depreciated. Moreover, if the effectiveness and productivity of fixed capital is rising, and yet the mass of labour is rising (that is in other words, despite a relative decline in the mass of labour employed due to a rising organic composition of capital) does the latter not suggest that capital accumulation on this latter definition is rising quite sharply?

    Might that not be why we are seeing labour shortages and wage rises?

  5. sartesian Says:

    “In the US, there has certainly been an expansion of the workforce, and that is true to an even greater extent in the global economy. ”

    Since when? Labor force participation rates in the US are below historic averages. Expansion since the depths of the recession in 2009? Since 2010?

    Anyone who knows anything about Marx, and capitalism, (which excludes Boffy from the getgo) knows that it is the rate, the increment, the relations of the expansion to the total available mass that counts, and so the post 2009 recovery in the US is definitely the weakest of all such recoveries from post WW2 recessions.

    And as for fixed capital: Marx has numerous passages in his Economic Manuscripts (1857-1864) in which he describes fixed capital as the near perfect expression of capital, the apotheosis of accumulation. The accumulation of capital is first and foremost, the accumulation of the MEANS OF PRODUCTION as capital.

    • Henry Says:

      “Anyone who knows anything about Marx”

      Remember this well troll spotters, according to Boffy the establishment of the normal working day involves no struggle! And he claims this is argued by Marx in capital 1, chapter 10!

      I simply refer to this as:

      https://www.marxists.org/archive/marx/works/1867-c1/ch10.htm#S5

      Holy Troll!

      And compare this from the Erfurt programme to Boffy’s sycophancy:

      “Ever greater becomes the number of proletarians, ever more massive the army of excess workers, ever more stark the opposition between exploiters and the exploited, ever more bitter the class struggle between the bourgeoisie and the proletariat, which divides modern society into two hostile camps and constitutes the common characteristic of all industrialized countries.”

      For Boffy capitalism is a social relation where everyone is a winner!

      What Boffy claims Marxism is and what it actually is are 2 very different things.

      The readers are warned.

      • Henry Says:

        More from the Erfurt programme on that happy social relation:

        “all the benefits of this transformation are monopolized by the capitalists and large landowners. For the proletariat and the sinking middle classes – petty bourgeoisie and farmers – it means an increase in the insecurity of their existence, of misery, of pressure, of oppression, of degradation, of exploitation”

        I can’t remember Kautsky criticising this!

  6. w ch Says:

    Michael could you please put the date at the top, I have had to scroll to the comments to see when this was written. I arrived here via a link on someone’s wall.

  7. sartesian Says:

    Those interested in how important Marx regarded the accumulation of fixed capital to the reproduction of value can look at the Grundrisse, Notebook VII Chapter 14. There Marx begins by stating:

    “From the moment, however, when fixed capital has developed to a certain extent – and this extent, as we indicated, is the measure of the development of large industry generally – hence fixed capital increases in proportion to the development of large industry’s productive forces – it is itself the objectification of these productive forces, as presupposed product – from this instant on, every interruption of the production process acts as a direct reduction of capital itself, of its initial value. The value of fixed capital is reproduced only in so far as it is used up in the production process. Through disuse it loses its use value without its value passing on to the product. Hence, the greater the scale on which fixed capital develops, in the sense in which we regard it here, the more does the continuity of the production process or the constant flow of reproduction become an externally compelling condition for the mode of production founded on capital.”

    He elaborates on this in the Grundrisse, and in several other notebooks that make-up the Economic Manuscripts.

  8. Frank Lee Says:

    ”And with headline inflation near zero, real disposable personal income rose. That’s why household spending was up. But while it’s true that the US unemployment rate continues to fall, the pace of that improvement is waning.”

    Mr Roberts seems to be taking US ‘official’ statistics at face value, a rather foolish and/or naive thing to do. Headline inflation is a political construction not an empirical fact. We should know by now that the headline inflation figure does not include items such as (in the US) food and fuel prices, it is also adjusted downwards by wheezes such as the implied ‘substitution effect’ and ‘hedonic pricing’ – in short the ‘headline’ figure (constructed in the main for propagandistic purposes) is not the real inflation figure. It seems that every time a government redefines a particular economic category, the figure drops, except that is for GDP growth where it rises. And whilst we are on the subject of growth, an understated headline inflation figure will give rise to an overstated growth figure since the GDP deflator will be lower than it should be.

    US unemployment continues to fall, yes and so, according to the US Bureau of Labor Statistics, does employment now at its lowest level since the 1970s. How is that particular circle going to be squared?

    See the excellent John Williams, Shadow Government Statistics.

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