Whither the global economy?

How is the global recovery after the COVID pandemic going?  The economic consensus is that the major economies are recovering fast, driven by rising consumer spending and corporate investment.  The problem ahead is not a return to sustained economic growth but the risk of higher or more long-lasting inflation in the prices of goods and services that could force central banks and other lenders to raise interest rates.  And that might lead to bankruptcies among highly-indebted companies and then a new financial crash. 

While that risk is clearly there over the next couple of years, will there really be a sustained recovery in economic growth over the next five years? Let’s remind ourselves of the official forecasts.  The IMF reckons that by 2024 global GDP will still be 2.8% below where it thought world GDP would have been before the pandemic slump.  And the relative loss of income is much higher in the so-called emerging economies – excluding China, the loss is close to 8% of GDP in Asia and 4-6% in the rest of the Global South.  Indeed, the forecasts for annual average real GDP growth in virtually all the major economies are for lower growth in this decade compared to the decade of 2010s – which I called the Long Depression.

There seems to be no evidence to justify the claim by some mainstream optimists that the advanced capitalist world is about to experience a roaring 2020s as the US briefly did in 1920s after the Spanish flu epidemic.  The big difference between the 1920s and the 2020s is that the 1920-21 slump in the US and Europe cleared out the ‘deadwood’ of inefficient and unprofitable companies so that the strong survivors could benefit from more market share.  So, after 1921, the US not only recovered but entered into a (brief) decade of growth and prosperity. During the so-called roaring twenties US real GDP rose 42% and by 2.7% a year per capita.  Nothing like that is being forecast now. 

And the reason is clear from Marxist economic theory.  A long boom is only possible if there has been a significant destruction of capital values, either physically or through devaluation, or both.  Joseph Schumpeter, the Austrian economist of the 1920s, taking Marx’s cue, called this ‘creative destruction’.  By cleansing the accumulation process of obsolete technology and failing and unprofitable capital, innovation from new firms could prosper.  Schumpeter saw this process as breaking up stagnating monopolies and replacing them with smaller innovating firms.  In contrast, Marx saw creative destruction as creating a higher rate of profitability after the small and weak were eaten up by the large and strong.

It’s true that, after plunging 35% last year, global corporate profits have staged a huge recovery this year and are on track to end the year at least 5% above their pre-pandemic trend. But if right, this would stand in contrast to global real GDP is expected to remain 1.8%-pt below its pre-pandemic trend.

This rise in profits has spurred some recovery in productive investment (capex), perhaps leading to a 5-10% rise in 2021.  But JP Morgan economists think this might be short-lived as their forecasting tool suggests a fall in investment “despite strong profit growth”.

The sharp difference between profits growth and productive investment growth is a key indicator that the 2020s will not be like the 1920s for the US or elsewhere.  There are two key reasons: first, continued low profitability (by that is meant profits relative to total investment in the means of production and the labour force); and second, high and rising corporate and other debt.  To avoid a slump like 1920-21 or 1929-32, in the Great Recession of 2008-9, governments and central banks slashed interest rates to zero and during the COVID slump added to the easy money policy with huge fiscal stimulus programmes.  The result is that there has been no clearing out of corporate ‘deadwood’.  Indeed, the so-called zombie companies (where profits are not sufficient to meet borrowing costs) are still here and in growing numbers.

Rise of the zombies (BIS data)

I have mentioned the rise of the zombies on many occasions before in this blog.  But there is new evidence to back up the cause of these zombie companies.  Two Argentinian Marxist economists, Juan Martin Grana and Nicolas Aguina, recently presented an excellent paper on zombie firms, entitled, A Marxist and Minskyan perspective on zombie firms. See this YouTube recording from 22.36 to 42.30. https://www.youtube.com/watch?v=4GWUkbGaD-U. Grana and Aquina show empirically that 1) these zombie firms have increased in number since the 1980s and 2) the cause is not the rising cost or the size of their debt but simply because these firms have much lower rates of profit from production, forcing them to borrow more.  So zombies have a Marxist, not a Minskyean cause.

Indeed, because of low profitability on productive capital in most major economies in the first two decades of the 21st century, profits from productive capital have increasingly been diverted into investment in real estate and financial assets, where ‘capital gains’ (profits from rises in stock and property prices) have delivered much higher profits.  Over the past two decades, the increase in asset values has primarily come from price increases, rather than through accumulated saving and investment.  McKinsey (see below) estimate that somewhat less than 30% of net worth growth in absolute terms was driven by new investment, while roughly three-quarters was driven by price increases.  This is making money out of money and not out of the exploitation of labour power.  So these gains are either at the expense of those selling at a loss; and/or potentially ‘fictitious’ as eventually the gains will not be realised if the productive sector should plunge.

According to a new report by the McKinsey Global Institute, two-thirds of global net worth (ie the market value of assets less debt) is stored in real estate and only about 20 percent in other fixed assets.  Asset values (real estate and financial) are now nearly 50 percent higher than the long-run average relative to annual global income.  And for every $1 in net new investment, the global economy created almost $2 in new debt. Financial assets and liabilities held outside the financial sector grew much faster than GDP, and at an average of 3.7 times cumulative net investment between 2000 and 2020. While the cost of debt declined sharply relative to GDP, thanks to lower interest rates, high loans to value produced does “raise questions about financial exposure and how the financial sector allocates capital to investment”.

Higher asset prices accounted for about three-quarters of the growth in net worth between 2000 and 2020, while new investment made up only 28 percent.  The value of corporate assets and equity has diverged from GDP and from corporate profits over the past decade. Since 2011, total corporate real assets grew as a weighted average by 61 percentage points relative to GDP across the ten countries.  But the corporate profits underpinning those values declined by one percentage point relative to GDP at the global level.

McKinsey is worried that this rising level of speculation in non-productive assets financed by more debt could turn nasty.  “We estimate that net worth relative to GDP could decline by as much as one-third if the relationship between wealth and income returned to its average during the three decades prior to 2000. Assessing scenarios including this reversion of net worth to GDP, a reversion of land prices and rental yields to 2000 levels, and a scenario in which construction prices moved in line with GDP since 2000, we find that net worth to GDP by country would decline by between 15 and 50 percent across the ten focus countries.”  In other words, a financial and property meltdown.

Now some mainstream economists have argued the gap between profitability and investment is misleading because corporations have increasingly been investing in what are called ‘intangibles’.  Intangibles are variously defined as investment in intellectual property rights for software, advertising and branding, marketing research, organizational capital and training. These investments do not cost nearly as much as investing in factories, offices, plant, machinery etc (tangible assets) and yet they deliver much more profit and productivity.  Or so the argument goes.

Over the past 25 years, McKinsey found that the share of intangibles in total corporate investment growth was 29% compared to just 13% in tangibles. The OECD reported in 2015 that intangible assets had expected returns of 24 percent, the highest rate among produced asset categories. 

But here’s the rub.  Despite the fact that digital trade and information flows have grown exponentially in the last 20 years, intangibles are still a mere 4 per cent of net worth.  They are not decisive in delivering higher investment among corporations in the major economies.  Fixed assets and inventories are six times larger.

It is still the case that what matters is investment in tangible productive assets.  As McKinsey puts it: “Our analysis confirms that gross operating surpluses, which are the value generated by a company’s operating activities after wages are subtracted, increase together with a rising pool of produced assets, which are assets resulting from production, including machinery and equipment and infrastructure as well as inventories and valuables”. The higher the value of produced assets, the more each worker in an economy contributes to GDP, ie a higher productivity of labour.

But the profitability of tangible productive assets has been falling.  So, as McKinsey puts it: “If a company invests, say, $1 million in new machinery, will the value of operating that machinery to produce a widget outweigh the value of the land underneath the factory where the machinery sits? If an individual invests in rental property, will any improvements to the property to increase rent be worthwhile compared to simply waiting for market-price appreciation?” For that reason alone, a roaring 2020s is not likely.

23 thoughts on “Whither the global economy?

  1. “For that reason alone, a roaring 2020s is not likely.”

    The Roaring 20s was the result of the impact of technological developments across broad fronts of industry.

    In the 2020s, we are again on the cusp of a new era of technological developments which are sweeping away the old.

    These developments are in the fields of energy production and storage, vehicular propulsion and AI/robotics.

    The impetus is coming from price signals and not government directives/policy which by and large has been absent.

    Underlying this is also the meat and veg renewal of long neglected infrastructure assets.

    1. “The Roaring 20s was the result of the impact of technological developments across broad fronts of industry.”

      As was the Great Depression.

      “In the 2020s, we are again on the cusp of a new era of technological developments which are sweeping away the old.

      These developments are in the fields of energy production and storage, vehicular propulsion and AI/robotics.”

      All of these developments (none of which new to the 2020s by the by) point to the end of capitalism: the increasing material wealth of the 19th and 20th centuries were fueled by fossils fuels which are becoming less and less abundant and profitable by the day. The replacement of oil with solar and wind is, at best, a “necessary evil” for capitalism inasmuch as these technologies are far more expensive in terms of energy input/output ratio vs. fossils fuels (if the sufficient implementation of these technologies is even possible under capitalism). AI and robotics contribute greatly to the TRPF through increasing the organic composition of capital, this being one of the the primary causes of capitalist crises.

      “The impetus is coming from price signals and not government directives/policy which by and large has been absent.”

      I doubt this is actually the case. It’s a well known fact that government subsidies have contributed greatly to the implementation of “renewable” energy resources, for instance. Anyhow, investment in new technologies by capitalists is made in anticipation of future profitability not “price signals” per se.

    2. Darren,

      “As was the Great Depression.”

      I’m not sure what you intend by this statement. I would say there arose a boom psychology which lead to over investment and over leveraging which led to the FED endeavouring to quieten things down with a couple of interest rate rises over 1928/1929 which stopped Wall Street in its tracks, and so on.

      “…this being one of the the primary causes of capitalist crises.”

      Yes, I understand this is how Marx saw these things. I said as much in another comment under another of Michael’s posts. I suggested that AI and robotics develop to the point where labour is not required at all – a form of communism being the only way that such a production system could be managed.

      “It’s a well known fact that government subsidies have contributed greatly to the implementation of “renewable” energy resources, for instance. ”

      Yes I agree that has been a factor.

      “Anyhow, investment in new technologies by capitalists is made in anticipation of future profitability not “price signals” per se.”

      To me, this is saying the same thing. Price changes modify the profit equation which results in redirection of investment.

      “All of these developments….”

      I’m not sure what the argument that your are advancing is. The fact is, that wind and solar have become significant sources of electricity production and this is because they are now cheaper than fossil fuels. You seem to be saying capitalism can’t handle global warming. As far as I can see it is, already. In Australia, head business organizations are pleading with the federal government to provide policy direction. And I can’t see why socialism would necessarily do a better job. Go back to the 20th century and you will find that socialist enterprise was responsible for as much environmental degradation as was capitalism.

      I have been reading “Twilight Capitalism”. The first two chapters have essentially dealt with the evils of capitalism – most of it I agree with entirely. But there is no mention of the evils of 20th century socialism. There is the presumption that socialism will deal with the covid pandemic and climate change in a more acceptable fashion than capitalism. So far all I have seen is assertion. I presume the authors will explain in later chapters, how and why socialism will perform better than capitalism. I look forward in anticipation.

  2. Early in 2020 the Dow hit 19,000. By late March it had dropped to 15,000. The injection of new liquidity and trillions of dollars of asset purchases by the Fed has now pushed it to 35,000 as of 19 November, almost double at the pre-pandemic peak. Yet real growth is in the 2% range and consumer inflation is 6.2%. Producer goods inflation is over 8%. So speaking of zombie firms and toxic assets, imagine the effects of a small increase in interest rates!

  3. In addition to the data presented by Michael, some other factors can probably be included in this view, even if these are not yet quantifiable:
    – the conscious reactions of the working people to the pandemic (demands for wage increases and better working conditions, consumption changes, etc.)
    – the aging of the active working class in Germany, Japan and several other countries
    – the economic effects of increasing global warming (droughts, storms, floods, etc.)
    – the restriction of capitalist alternatives to new regions and markets due to increasing competition between the USA, China and other countries
    – the rising costs of the coal phase-out and other political measures against climate change …

    All of these factors have a negative effect on capitalist profit rates.
    Wal Buchenberg, Hannover

  4. Michael you are an impatient scholar. Next week the BEA releases third quarter corporate profits, which for the first time will be relatively uncontaminated by the Covid subsidies which have inflated profits since the second quarter of last year. The thing to look for next week is quarter to quarter changes not annual changes.

    Where I get impatient is the lack of quality reporting when it comes to US retail sales. I downloaded the trading reports of all the major US supermarkets, the top two D.I.Y. stores, the three major food companies, the three major car companies and the three major consumer products companies. I limited their revenue to N. American sales only, including Amazon. The total revenue for these 21 companies was over 30% of the total revenue for Retail, or $508 billion vs $1,462 billion for the third quarter. Whereas the Census Bureau claimed retail sales grew by 12.5% between the third quarter of 2021 and that of 2020 ($1,645 billion vs $1,462 billion), the data direct from companies only registered a mere 5.2% increase in their revenues or $483 billion in 2020 to $508 billion in 2021. The 5.2% barely covers inflation. Shurely shome mishtake shomewhere. There was a time US statisticians criticised Chinese data as unreliable, I think now the opposite is true.

    Good point about the recession of 1920-21. Well observed point about a potential loss of one third in fictitious value made by McKinsey. “We estimate that net worth relative to GDP could decline by as much as one-third if the relationship between wealth and income returned to its average during the three decades prior to 2000.” That is equal to one year’s global GDP. Surely a financial bubble too big to fail. The Central Banksters have created a monster which they need to keep feeding.

  5. Hi! Great posts of the inflation issues. Looking forward to your next installment. Can you point me to one of your blog posts on the slow recovery/long depression between the 2008/9 crisis and covid? I recall your analysis of low gdp and investment, rising private debt and zombie firms, declining profit rates for non financial and non tech firms, etc. Is there one blog post that summarizes the situation right before covid hit? Thanks Jerome Klassen Boston

    On Fri, Nov 19, 2021, 10:51 AM Michael Roberts Blog wrote:

    > michael roberts posted: ” How is the global recovery after the COVID > pandemic going? The economic consensus is that the major economies are > recovering fast, driven by rising consumer spending and corporate > investment. The problem ahead is not a return to sustained economic grow” >

  6. Micheal, I’d like to have your view on this article by Fabio Vighi. Fabio Vighi is a professor of Critical Theory and Italian at Cardiff University. He makes an interpretation of the events of the last two years from a Marxian and Lacanian perspective. What I find very interesting in that perspective is the idea that the medical emergency, of which he doubts the “emergency” character, was used as an opportunity to implement “unconventional monetary policies”, by the Central Banks, of injecting trillions in the financial system, in response to a crash in the repo markets on mid-September 2019 (sudden rates spikes from 2% to 10.5%), all the while avoiding the consequent hyperinflation by deflating the real economy, hence the lockdowns, the closures of businesses and so on:

    This view goes in opposite direction to that the traditional Left which he critiques, and which believes that the medical emergency is causing the collapse of the capitalist mode of production. For Vighi, it’s the opposite, the crash in the repo market caused the implementation of policies to deflate main Street under the pretext of a health emergency, in an attempt to “prolong the agony” of a system unable to extract surplus value from labor.


    Sorry about the English, not my native language.

    Thank you.

    1. In one way I agree with Vighi. The world capitalist economy was already heading for a slump before the pandemic broke. But I do not agree that the COVID pandemic was not a medical emergency. Millions have died and many millions more would have done unless action to protect the population had not been taken. The best action would have been preventative vaccination research (not done); strong and robust health systems with plenty of capacity for emergencies (not done). Governments were forced into lockdowns and stringent social distancing measures because privatised and decimated medical and health systems could not cope and hardly existed in poor countries. Also many people are unhealthy and sick because of the lack of proper healthcare and so very vulnerable to new viruses. Yes, governments can and did take advantage of lockdown laws to restrict working class activity and yes the big monopolies and finance institutions have made lots of money out of the slump BUT governments were continually trying to end the lockdowns in order to get economies back to ‘business as usual’. So I do not consider that 1) there was no health emergency or 2) that lockdowns were just state repression actions and were not needed for people’s health.

      1. The spanish flu took 50 million lives, about 10 times that of Cov 19 (not including the incalculable number deaths projected by capitalism’s boosters of an endless line of profitable “variants”. …Not to say that 5 million plus Codvid deaths (in the US 90% of which were age 80 years or older) is nothing, but to point out that Covid’s virulence has been strategically exaggerated by experts aligned with capitalist interests like the Rockerfeller and Gates foundations and their plan to vaccinate the entire world with their super-effective, super-patented, still experimental (but turning out not so super) vaccines.

        …Also “lockdowns” are one thing, but the capitalist state’s mandates are something else: attacks on labor which are triggering a heterogeneous (not just neo-fascist organized) resistence everywhere. These demonstrations have to be understood for what they are: resistence ot capitalist oppression.

      2. MR, I wonder if you are aware that my comment answering yours on Vighi had been expunged within an hour its veing sent. It doesn’t appear even on my screen. I can’t believe you had anything to do with that.

      3. ” These demonstrations have to be understood for what they are: resistence ot capitalist oppression.”

        Really? Like the one in Italy that attacked labor union headquarters in October? Or the one in Melbourne in September that tried to smash into the construction union headquarters?

        Or the one intimidating and threatening public health officials in the US, or school administrators who want to mandate masks for school children?

        The ones flying Trump flags? Those are anti-capitalist resistance? Sure, and the Nazis were socialists.

      4. Oh and one more thing– Marthajpc needs to check her numbers: those 80 and over do not account for 90% of the deaths in the US; not even close. Those 75 and older account for 52% of the Covid19 deaths in the US. There’s more than enough misinformation out there. We shouldn’t be using this site to spread even more.

    2. TCR

      So the pandemic was created by Western Capitalism.

      Where was China and Russia?

      Why did they not call out the game?

      Seemingly, they were in on it, otherwise?

      1. What do you mean by “Western Capitalism”? Ever since the years of WWI, Capital ceased to be in formal domination; it is now in real domination: it has conquered the totality of space, including the far East, and is the law everywhere.

        IMO, China and Russia’s interest in salvaging the system is the same as that of the US and Europe. About the pandemic, I wouldn’t risk an opinion but a lot of things don’t add up.

      2. TCR

        “What do you mean by “Western Capitalism?”

        The economic systems of the US, UK, Japan, Germany, France and the like.

        Is that clear enough?

        I would say that the only economy that isn’t capitalist is the Cuban. All the other socialist economies have adopted capitalist reforms. (And of course, the Cuban people are now rising up against the Cuban regime.)

        I would not say that the economies of Russia and China should not be included in Western Capitalism. I would say they are capitalist but totalitarian states – I would say a more apt description of them would be fascist – state hegemony plus oligopoly capitalism.

        The point was being made by Vighi that the pandemic is to be sheeted home to Western Capitalism’s dastardly cruel plan to further suppress labour. So if this was the case why did Russia and China behave like the Western Capitalist nations? Would you not think that if there was a conspiracy afoot that they would call it out and not behave as the capitalist nations?

        Vighi’s paper is just fanciful nonsense and how anyone would give it a second glance, I cannot fathom.

    3. Marx and Engels understand capitalism through social and economic laws that enforce themselves behind the backs of the people, as it were under the laws of nature.
      “… In the history of society, the actors are all people who are gifted with awareness, who act with deliberation or passion, and who work towards specific purposes … Only rarely does what is wanted happens, in most cases the many wanted purposes or conflicting with one another are these purposes themselves impracticable from the outset or the means are inadequate. Thus the clashes of innumerable individual wills and individual actions in the historical sphere bring about a state which is entirely analogous to that which prevails in unconscious nature. The purposes of the actions are willed, but the results that really follow from the actions are not wanted, or if they initially seem to correspond to the wanted purpose, they ultimately have completely different consequences than the wanted ones. ”F. Engels, Ludwig Feuerbach, MEW 21, 296f.
      For Vighi, capitalism is a worldwide puppet theater that is directed and controlled by very few people at very few control points. This children’s fairy tale is nowhere supported by data and facts, but filled with assumptions (“cui bono”). The names have been swapped – instead of World Judaism one speaks here of FED or WTO – the story is completely the same. It’s a crude conspiracy theory.

      Wal Buchenberg, Hannover

      1. RE: “For Vighi, capitalism is a worldwide puppet theater that is directed and controlled by very few people at very few control points. ”

        I don’t think that’s exactly what he says. From what I could gather from his published articles and videos, Capital is an impersonal impulse, in line with the quote above and with what Marx says in, for instance, the 1844 Manuscripts:

        “Capital is thus the governing power over labour and its products. The capitalist possesses this power, **not on account of his personal or human qualities**, but inasmuch as he is an owner of capital. His power is the purchasing power of his capital, which nothing can withstand.

        “Later we shall see first how the capitalist, by means of capital, exercises his governing power over labour, then, however, we shall see the **governing power of capital over the capitalist himself**”. [Emphasis added]

        In more than one occasion, Vighi points out that even those who are pulling the strings don’t know how to get out of the mess; they react to the situations as they arise and sometimes they plan responses ahead of time, not in the spirit of conspiring – which presupposes freedom of choice and the deliberate selection of the option that is detrimental to us all – , even though we may perceive it that way, but because the choices themselves are imposed upon them by the logic of Capital. Also, he frequently speaks of Capital as a machine moved by its own inertia, which is antithetical to a few individuals deliberately controlling it.

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