It’s all down to the FAANGS

The world economy continues to show significant signs of a slowdown.  Back in April 2018, I reckoned that the mini-boom of 2016-17 had peaked and the world economy would now descend into another Kitchin cycle downswing.  Moreover, this showed that nearly ten years from the end of the Great Recession in mid-2009, the world economy was still stuck in a Long Depression, or ‘secular stagnation’ (in Keynesian language).

Last month, data showed that the German economy, the powerhouse of Europe, had only narrowly avoided a ‘technical recession’ in the second half of 2018.   This was partly caused by the global slowdown in the auto sector due a sharp drop in demand along with restrictions on diesel car emissions.   Now in February, the EU Commission slashed its real GDP growth forecasts. The Commission cut its Eurozone growth forecast for this year to 1.3% from 1.9% in its earlier forecast last autumn, citing “large uncertainty” from Brexit negotiations, slowing growth in China and weakening global trade.  At the same time, the Bank of England cut its forecast for the country’s economic outlook in the wake of greater uncertainty over Brexit and a slowdown in global growth. The downgrade for 2019 growth expectations to 1.2% is the weakest level in a decade.  The Eurozone growth rate for the last quarter of 2018 is already there.

The last week, we got the figures for UK real GDP growth at the end of 2018.  Real GDP growth was just 0.2% in Q4 2018 over the previous quarter. Indeed, the industry and construction sectors actually contracted. Manufacturing output has been shrinking for six months.  Real GDP growth year over year (ie from Q42017 to Q4 2018) has slowed to just 1.2% (meeting the BoE forecast for 2019 already).  This was the slowest annual rate since 2012.  UK business investment in new technology, plant and equipment has also slumped badly – down for four consecutive quarters and down nearly 4% yoy. As a percentage of GDP, business investment has been falling for over three years. British business is on an investment strike.  The risk of an outright recession in the UK this year has risen sharply.

What’s happening in the UK economy is not all due to uncertainty over what happens with Brexit. It is also due to the global slowdown, particularly in Europe and China.  Japan is teetering on a recession, with growth in the last quarter of 2018 at zero.

China’s growth rate continues to slow – if still far higher than anything in the advanced capitalist economies.

And, as I pointed out in a previous post, among the so-called ‘emerging economies’, emergence is being replaced by submergence.  Real GDP in Latin America as a whole is contracting on annualised basis, according to investment bank JP Morgan.

But the key to whether this slowdown becomes an outright recession (mainstream economics defines that as two consecutive quarterly declines in real GDP) is what happens in the largest and most important capitalist economy, the US.  Up to now, the US has been the leader of the pack, at least among the top G7 economies, with a real GDP growth rate of 3% at the end of 2018.

But as many have argued, this growth rate is ‘fake news’ as President Trump might put it.  It has been driven by huge tax cuts for US corporations that have boosted profits by up to 30% in the last year.  The impact of these will soon wear off in 2019.  And it is already happening.  According to the forecast of the Atlanta Federal Reserve, real GDP growth in the US will slow to just 1.5% in this current first quarter of 2019.

This latest forecast was a huge drop from the already slower 2% than Atlanta previously forecast.  That was because of really bad retail sales figures announced last week.  These may have been distorted by the US government shutdown in January and seasonal factors, but even so it is clear that the US economy is beginning to join Europe, Asia and Latin America in a significant downturn.

Actual nominal GDP has continued to weaken in the US, and even more so in Europe and Japan.  The Long Depression continues.

In my view, there are two key factors that drive a capitalist economy: 1) investment in the capitalist sector and 2) the profitability of that investment.  The latter decides the former, after a lag (according to empirical studies, usually a lag of about one year).

It seems that global investment is now stalling.  JPMorgan investment bank economists are signalling a significant slowdown in global investment spending in the first quarter of 2019.  “In sum, we have worried for some time that the sustained slide in global business confidence would translate into a meaningful deceleration in capex. This appears to be happening now, especially following the tightening in financial conditions in 4Q18. Indeed, the data we have in hand might not reveal the full extent of this pullback.”

The JPM economists cite “business confidence” and “tightening financial conditions”, by which they mean that companies are worried about future profitability and sales alongside rising interest costs on debt.  Will the budding trade war between the US and China explode?  Will the Fed and other central banks continue to raise their policy interest rates and thus ‘tighten’ financial conditions?

But rather than consider the psychology of capitalists, it is more rewarding to consider the objective conditions, because the latter informs the former.  Globally, business investment has been in decline (as a share of GDP) since the end of the Great Recession.  This relative decline has been led by the US and Europe.

It is often argued that investment to GDP is now lower because modern corporations don’t need to invest so much in tangible assets like equipment, offices and factories, because investment is now increasingly in ‘intangibles’, like patents, ‘intellectual property rights’ and software (even ‘goodwill’).  But the evidence for this conclusion remains highly dubious.  See Olivier Blanchard’s note on this here.

Then there is the argument that companies like Apple, Google, Microsoft, Amazon etc have merely hoarded their profits as cash or switched it into buying back their own shares to improve the financial value of their companies and boost the top executives bonuses.  But this latter explanation, in my view, merely confirms that the real reason for lower business investment to GDP is that profitability of productive capital globally remains near post-war lows and for most economies is still below the level reached in 2006 or the late 1990s.

Here is the level of profitability of capital globally as calculated by Esteban Maito in our recent book, World in Crisis, Chapter 4.

And here is the secular decline in real GDP growth in the advanced capitalist economies that accompanies the secular fall in profitability (as calculated by Alan Freeman in a new paper.

And here is what has happened to the profitability of capital from the beginning of the credit crunch in 2007 and the ensuing global financial crash and Great Recession, followed by the weak recovery and the Long Depression.

Over the whole period, Eurozone and US profitability is still below the 2007 level, while UK profitability is virtually flat.  Only Japan shows a rise.  In the ‘recovery’ period of 2010-18, profitability in the US and the Eurozone failed to recover.  But in the recent mini-boom, there was some positive rise.

Actually, the big American tech companies (FAANGS) are the exception that proves the rule.  There are whole swathes of smaller capitalist enterprises that are struggling to deliver enough revenues and profits to service their debts even though interest rates have remained way lower than before the global financial crash.  I have covered this issue of zombie companies in previous posts, but the subject takes on an increasing relevance if ‘financial conditions’, as JPM calls it, continue to tighten globally. Indeed, according to another investment bank, Goldman Sachs, corporate sales growth is now at its lowest rate (on a 10-year rolling basis) since 1945!

If sales growth is weak and interest costs rise, then profits will be squeezed.  Goldman’s economists note that since 2010, profit growth outside the US has stalled.  The only place where corporate earnings have expanded is in the US.  And this, according to Goldman’s is entirely down to those super-tech companies.  Global profits ex technology are only moderately higher than they were prior to the financial crisis, while technology profits have moved sharply upwards (mainly reflecting the impact of large US technology companies), driven by a combination of strong sales growth and sharply rising margins.

Global growth is set to slow sharply in 2019.  This is because business investment growth, already weak in the Long Depression, is going to drop off further.  In turn, that investment slowdown is driven by low profitability in most economies and in most sectors.  Only the huge tech companies in the US have bucked this trend, helped by a recent profits bonanza from the Trump tax ‘reforms’.  But as the effect of those handouts wear off this year, tech profits may also head downwards – even if the US and China reach a trade deal.

9 thoughts on “It’s all down to the FAANGS

  1. Global wealth continues to rise in value. From the Credit Suisse Global Wealth Report, 2018 — “A person needs net assets of just USD 4,210 to be among the wealthiest half of world citizens in mid-2018.” $63,100 is the new average wealth per adult worldwide. The lower half own 1% of all wealth, the top 10% own 85%. World wealth in constant USD increased from $117 trillion in 2000 to $317, not quite tripling. The surplus has been expropriated, the result is an inflation in financial asset values, and some tangible value appreciation. My view is that wealth and income dispersal is extreme and anti-social and will lead to collapse. The self-defeating logic of capitalism follows the goal “more capital” and to hell with people. Cut labor costs, drive out competition, sell, sell, sell. The cheer leaders own the media, everything is swell. In the U.S. this is the story since 1945: A report from the Economic Policy Institute, “The New Gilded Age” shows (page 12) with voluminous detail the history and extent of income inequality. In short it contrasts two periods of growth, the 28 years between 1945 and 1973, contrasted with the 42 years 1973 to 2015. In the first period 4.9% of growth went to the top-earning 1%, and 95.1% went to the lower-earning 99%. In the second period 56% went to the top 1% while 44% went to the lower 99%. In the first period the real inflation adjusted incomes of the 99% doubled, all 99% of households increased income by 100.1% in 28 years. In the second period of 42 years the lower 99% increased their incomes by 15.4%. The top 1% increased their incomes by 216.4%, more than tripling. This a jaw-dropping report of extreme economic disruption. — Read the rest at

  2. Here are your graphics in a new guise.

    What strikes me:
    1) The average rate of profit of the capitalist core zone is permanently twice as high as the profit rates in the core zone. This is consistent with the observations of Karl Marx. He said:
    “This is particularly important in comparing rates of profit in different countries. Let us assume that the rate of surplus-value in one European country is 100%, so that the labourer works half of the working-day for himself and the other half for his employer. Let us further assume that the rate of profit in an Asian country is 25%, so that the labourer works 4/5 of the working-day for himself, and 1/5 for his employer.
    Let 84c + l6v be the composition of the national capital in the European country, and 16c + 84v in the Asian country, where little machinery, etc., is used, and where a given quantity of labour-power consumes relatively little raw material productively in a given time. Then we have the following calculation:
    In the European country the value of the product = 84c + 16v + 16s = 116; rate of profit = 16/100 = 16%.
    In the Asian country the value of the product = 16c + 84v + 21s = 121; rate of profit = 21/100 = 21%.
    The rate of profit in the Asian country is thus more than 25% higher than in the European country, although the rate of surplus-value in the former is one-fourth that of the latter. Men like Carey, Bastiat, and tutti quanti, would arrive at the very opposite conclusion. Karl Marx, Capital III, 115.

    2) The theory of Marx also agrees with the fact that the rate of profit on the periphery (with the exception of the years between 1982 and 1991) has steadily declined.
    While the rate of profit in the capitalist core zone declined until 1982, but increased between 1982 and 2007 – the “age of globalization”. This increase in the rate of profit still needs to be explained.

    Wal Buchenberg, Hannover

    1. Marx’s argument depends on a lower organic composition of capital in the countries of the “periphery,” but is that actually the situation in the modern world? Is the higher rate of profit due to a lower organic composition, or… it the lower wage combined with the advanced technology the magnifies the profitability in the periphery?

      1. Carchedi and I are doing some empirical work on this. So far, we find that the OCC is higher in imperialist countries with the wage effect being less important. Of course, through international trade and production prices, profitability tends to be equalised and so value is transferred from the periphery to the imperialist economies. But more on this late in the year!

  3. I wrote: “The average rate of profit of the capitalist core zone is permanently twice as high as the profit rates in the core zone.”
    Sorry, that must be right: “The average rate of profit of the capitalist periphery…”

    1. Wal, yes i agree with your conclusions. G Carchedi and I are doing a paper on the economics of imperialism which we hope to publish soon. In that we develop the points you make. By the way, we have explained the modest recovery in core ROP after the early 1980s – the counteracting factors in the law were stronger, although the ROP in the productive sector was still low.

      1. Could it be that the calculation of the rate of profit within the core zone also includes corporate profits generated abroad? That would be a possible explanation for the increase in the rate of profit due to globalization.

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