Don’t expect any help from Japan or Europe

US economic data gave somewhat conflicting outcomes in August.  First, we found that the US economy grew far less than expected in the second quarter of 2016. Real GDP (that’s after inflation is removed) increased at only a 1.2% yoy rate. And business investment fell at a 9.7% annual rate, the third straight quarterly fall. On the other hand, in July, the US economy added 255,000 more jobs, while wages (before inflation and taxes) climbed 2.6% compared to July 2015.

US earning

It is this strongish labour market plus rising nominal wages that made the Goldman Sachs economists conclude that things are looking up for the US economy.  “As a result, the US economy is now much more “normal” than widely perceived, in our view. By this we mean that the usual features of a mid-to-late expansion economy—full employment and even a somewhat hot labor market, inflation near or perhaps even above the target—are likely to eventually emerge in the years ahead.”  However, the GS economists, unlike those at JP Morgan, ignore the sharp fall in corporate profits and business investment that suggests the US economy is not about to turn ‘hot’ – on the contrary.

US corporate profits

 

Also, US retail sales figures for July do not show a pick-up in consumer demand that GS expects.  Retail sales growth has been slowing throughout 2016.  Sales in the shops and online are only 40% of American household’s expenditure – the rest is on housing, health, education, utilities etc.  So the jury is out on whether American consumers are not accelerating their spending or not.

US retail sales

Anyway, what is clear is that, even if the US economy is pretty much okay and has made a reasonable recovery from the 2008 Great Recession, according to the GS economists, that cannot be said for the other major capitalist economic areas, Japan and Europe.

I have pointed out before that Japan continues to struggle with little or no economic growth despite four years of Abenomics (monetary injections, fiscal stimulus and neo-liberal labour reforms); and despite the advice of monetarist guru, Ben Bernanke, ex-chief of the US Federal Reserve and Keynesian fiscal guru, Paul Krugman, both of whom have called on Japan’s conservative prime minister Shinzo Abe to continue with yet more monetary stimulus (helicopter money) and fiscal spending (budget deficit).

But nothing seems to be working.  Japan failed to grow at all in Q2 2016, a sharp slowdown from 2% growth in Q1.  And it was business investment that collapsed as corporate profits have fallen since the beginning of the year.  The purchasing managers’ index came in at 49.3 in July from 48.1 in June.  Any figure below 50 is meant to indicate a contraction.

Japan PMI

Again, like the US, the Japanese labour market has been reasonably strong with the unemployment rate at its lowest in 21 years.  Abe makes much of this but the decline in unemployment is much more to do with Japan’s ageing and declining population.  The number of people of working age looking for work is just falling.  Moreover, most of those who got work got temporary contracts not regular work.

Japan jobs

The attempt to hike sales taxes in 2014 in order to bring the government spending deficit and debt under control only caused a collapse in spending by Japanese households which has not recovered (see graph below).  So the Abe government postponed any further tax hikes and reversed policy by announcing a large fiscal spending package.  Thus the government swings from neo-liberal measures to Keynesian ones with little success.

Japan growth

Indeed, the main target for the Japanese government is to get inflation rising at around 2% a year. This supposedly would engender more consumer spending and get the economy going. Such is the view of Keynesians advising Abe.  But monetary and fiscal policy have signally failed to achieve that.  Now that the effect of the sales tax hike has fallen out of the figures, Japan has returned to deflation.

Japan inflation

Average wages are growing at less than 1% a year, so it is just as well prices in the shops are falling or Japanese households would be suffering a major fall in living standards.  The reason monetarism and Keynesianism have failed in Japan is because the capitalist sector will only grow if more investment takes place and investment only takes place if corporate profits are rising, not falling as now.  This leading economic index shows which way the Japanese capitalist sector is going.

Japan leading index

The situation is no better in Europe.  The UK economy had been the best performer in economic growth last year, matching that of the US at just over 2% a year.  Now all the signs are that UK businesses have stopped investment plans and foreigners are also holding on back on investing in UK Inc until the issue of the new terms for the UK-EU trade and investment is clear and that could take years.

In the Eurozone, things are much worse.  Joseph Stiglitz, the American Nobel prize winner in economics, has a new book out in which he argues that the crisis and slump in the Eurozone is due to the euro itself.  He reckons  that “the eurozone was flawed at birth” and that “the euro created the euro crisis”.  That’s not my view. I have argued that the euro debt crisis is part of the crisis of capitalism in 2008-9, the Great Recession. The euro did not “create” the euro crisis, even though the EU project and the euro has fundamental flaws.

Even if the euro had collapsed and EMU states had returned to running their own monetary and currency policies, the crisis would not have gone away and may even have been worse. That’s because the euro crisis was the product of the failure of the capitalist mode of production globally. The crisis was only partly a result of the policies of austerity being pursued, not only by the EU institutions, but also by states outside the Eurozone like the UK. Alternative Keynesian policies of fiscal stimulus and/or devaluation would have done little to end the slump.

But what the single currency area has done is to increase divergence between the weaker capitalist states within the Eurozone like Greece, Portugal, Ireland and Spain and the stronger ‘core’ states, in particular, Germany.  The global capitalist crisis has hit the weaker periphery really hard while Germany has recovered better.

Europe growth

Indeed, it is only German capitalism that has made any sort of recovery since the end of the Great Recession.  Only German investment is above pre-crisis levels in Europe (including the UK).

German investment

In contrast the condition of Greek capitalism has never been worse in its short history. The collapse of the Greek economy is almost without precedent. Real household consumption has dropped by 27 per cent since the peak.

Greek living standards

Greece’s capital stock has been shrinking by about 6 to 7 per cent of output since 2012.  The nonfinancial corporate sector, which shifted the bulk of its liquid assets outside Greece in 2009-2011, has nevertheless experienced a decline in its deposits by more than 35 per cent since the peak in 2012:

Now despite three ‘bailouts’ by the IMF and the Euro leaders (in reality bailouts for foreign banks and then funds in order to reduce debt through austerity measures), the Greek economy remains in a dire despond.

Close to half a million Greeks are believed to have migrated since the crisis begun, thanks to the searing effect of persistent unemployment (at just under 24%, the highest in Europe) and an economy that has shed more than a third of its total output over the past six years.  And still consumption and exports fell by 6.4% and 7.2%, in the second quarter of this year.  The duration and depth of the recession is such that the World Bank now compares it to the slumps seen in eastern European countries in the early 1990s. The poorest 20% of Greece’s 11 million people have suffered a 42% drop in disposable income since 2009.

Italy’s economy may not be in a deep depression like Greece but it is not growing at all.  And as a result, its banks have built up a huge potential loss on the loans they have made to Italian companies – it is estimated that there are €360bn ‘non-performing loans’ on their books.

One bank Monte Dei Pasche is so weak and has so much ‘bad debt’ that is basically bankrupt. The Italian government wanted to bail it out with state funds but the new EU banking rules do not allow that unless all the bank bond holders first take a hit.  Unfortunately, most of these bond holders are ordinary Italians who were persuaded to put their savings into these bank bonds by the banks in the biggest piece of misselling in Italian history.  Hundreds of thousands would lose their life savings if their bonds were written off.

So now the government is desperately trying to get more secure Italian banks and foreign hedge funds and investment banks to invest in to save the day – on very sweet terms, of course. The Italian bank crisis is yet another indicator of the failure of Italy’s economy to recover and of what could happen across Europe in banking if growth continues to stutter.

And Eurozone growth is stuttering still.  The Eurozone as a whole started to recover after its huge debt crisis in 2012-14, but annual growth just does not rise above 1.5% or so – and nearly all the growth is in Germany and the Netherlands.

It is my view that the US economy remains the most important in levering global growth.  I did not agree that China, for example, would pull the world down.  If US economic growth starts accelerating as Goldman Sachs economists suggest, then that will spill over into Europe and Japan – and even help China.  On the other hand, the US will get no help from Europe and Japan in restoring a healthy global capitalist economy.,

6 Responses to “Don’t expect any help from Japan or Europe”

  1. Jim Moody Says:

    What’s happened to your latest book, Michael? Ordered a month ago from Amazon, but nada so far. Any ideas as to why? Don’t capitalist distributors want to make money from their gravediggers.

    • michael roberts Says:

      Jim

      What can I say? It seems that Amazon did not order enough from the US OR Haymarket did not print enough for them. Either way, there seems to be a massive delay in getting the book in sufficient numbers into the UK.

  2. critiqueofgeopolitics Says:

    Whenever the growth rates of rich-world economies is referenced, the per capita aspect must be taken into account at all times. Countries like the US, UK, France and Sweden have experienced massive population growth in recent years due to an influx of immigrants. This process tends to massively inflate GDP growth rates, but not GDP per capita. Japan actually has a stagnant and even slightly falling population, so her GDP growth rates cannot directly be compared with those of the UK/US/France. On a per-capita basis, the comparison looks infinitely better for Japan. Germany also used to have a stable population until the recent immigrant influx which again must also be taken into account. In fact I remember a very good post on this very blog from a few months ago which made this point very clear.

    • michael roberts Says:

      You are right. I shall have a look again at how things are going on a per capita basis. Of course, when you are dealing in quarters of a year,the per capita measure is less useful or possible.

  3. joel Lazarus Says:

    ‘…the biggest piece of misspelling in Italian history’!
    Wonderful pun to add to the usual indispensable analysis.
    Can I ask you a question as an avid regular reader? When you’re calculating profit rates, do you somehow take into account state subsidies and state contracts at inflated rates? My suspicion is that, during this, I believe, terminal, moribund stage of capitalism, the rop would look far worse if such state subsidies and contracts were excluded.
    Thanks, joel

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