The long depression – the waste of capitalism

by Michael Roberts

The latest high frequency data on the state of the world economy are now available for April.  I use a combined index of activity in manufacturing and services in the major capitalist economies based on the so-called purchasing managers indexes (PMIs).  Starting with the US, it shows that the US is still in a low-growth trajectory and not in recession or boom, although the direction is downwards.

This is confirmed by the even more frequent, but less reliable, ECRI weekly index.

And for the world as a whole and other regions, it is much the same story – when the PMI for a country is above 50, it is expanding and below means contraction.

Only the Eurozone is in a confirmed recession.  Even the UK is still in a low growth expansion, contrary to the first estimates for UK GDP in Q1’12 that indicated that it was in a technical recession (see my post, Britain’s technical recession, 25 April 2012).  It is likely that those UK GDP figures will be revised up to a small positive position.  But overall, it suggests that the world economy is growing at about 3% a year, with the US at around 2% and the rest at under 1%.  The graphic below shows where the G7 top capitalist economies were sitting at the end of 2011.

World capitalism’s recovery from the Great Recession is the weakest turnaround from a slump since the 1930s. In effect, world capitalism, at least its mature capitalist economies, is in a long depression.  In many economies, the previous peak in output before the slump has not been surpassed.  Only the GDPs of North America and Germany have achieved that.  The rest of Europe and Japan are still in a slough of despond some four years since the Great Recession began.

Even more defining is the sheer waste of the capitalist mode of production.  Factories are idle or under-used, many more millions are out of work (labour participation rates in the major economies have never been lower) and output has been lost forever.  After the deep ‘double-dip’ recession of the early 1980s, the US economy took three years to get back to the level of GDP that it would have achieved if there had been no slump.  Potential output of some $1 trillion was lost forever (that’s the gap between actual output and potential output from 1982 to 1985 in the graph below).

But this time it ‘s much worse.  About $1.5 trillion dollars of output (or over 10% of potential GDP) was lost in the Great Recession of 2008-9, but the recovery is so weak this time that output cannot catch up to where it would have been without the slump and there is now a permanent loss of output of nearly $1 trillion a year (6% of potential GDP) and no sign that the gap is going to be closed.   And this is just the US economy, which is doing relatively better than others.

And, despite all the ‘deleveraging’ of ‘excessive debt’ , massive job losses and the shrinking of assets, profit growth in the major economies continues to slow.  US profits are still growing at a 7% annual pace, but in Germany, the UK and Japan, profits are now contracting.

The depression in Europe is particularly severe.  The Eurozone unemployment rate has hit 10.9% — its highest level since the euro was launched in 1999.


The long depression continues.