World Economy: The long and winding road

by Michael Roberts

The world economy remains locked into a Long Depression. In previous posts, I have highlighted the measures that I use to gauge the most up-to-date state of the world economy. They show that the US economy is not heading into another slump yet and neither is China or even the UK. But with many Eurozone economies contracting and Japan struggling, the world economy is going nowhere.
The most high frequency measures of economic activity are the so-called purchasing managers indexes (PMIs) for each country, compiled as surveys from companies on production, employment and prices.  I have combined the US indexes for manufacturing and services into combined index.  It looks like this to September 2012.

So the US remains in a low growth pattern.  An even more frequent gauge is the ECRI weekly indicator of the US economic activity.  It confirms the same picture of low growth with even a hint of a slight pickup in pace.

And when we look at the PMIs in the rest of the world, they show a patchwork story.  The US, the UK (just) and China are still growing, if slowly, while Japan and the Eurozone are contracting.  Overall, world capitalism is in the  doldrums.

The semi-annual IMF-World Bank meeting takes place in Tokyo this weekend and the IMF’s chief economist Olivier Blanchard took the opportunity to warn that it will take a decade for world capitalism to recover from the financial crisis and the Great Recession: “It’s not yet a lost decade,” he said. “But it will surely take at least a decade from the beginning of the crisis for the world economy to get back to decent shape.”  If he is right, that is the defintion of a long depression.
The IMF is also cutting its estimates of global growth yet again this year because of the tepid recovery in the United States, a slowdown in emerging economies and continued troubles in the euro zone.  In its last estimate, the fund forecast global economic growth of 3.5% in 2012 and 3.9% in 2013 – low enough anyway.  At the same time, the World Trade Organization has slashed its forecasts for global trade, cutting its estimate in 2012 to 2.5% from 3.7% and from 4.5% from 5.6%.  The WTO commented: “It seems likely that world trade will grow by less than world GDP this year,” a very rare event in this era of globalisation.

The policies of governments and central banks lower interest rates and expand the money supply to boost demand have failed to restore economic growth anywhere near that achieved between 2002 and 2007, let along that reached in the 1990s.  The world’s eight main central banks have tripled their combined balance sheets from $5 to $15 trillion. Yet the global economy managed only a 2.8% rate of real GDP growth in the last quarter, the slowest rate since the depth of the Great Recession.
The US is set to grow at 2.1% this year and 2.0% in 2013.  Indeed, it grew only at a 1.7% rate in Q2-12, slowing from 2.0% in Q1-12 and 4.1% in Q4-11. The EU is set to contract by -0.5% in this year and -0.4% next year.  Unemployment rose in July to 11.3% and under-25 joblessness reached 22.6%, the highest on record since 1995 .  In the latest quarter, Q2-12, real GDP fell by -0.5% in the Eurozone.  In Japan, between 2012 and 2013, growth is set to decelerate from 2.2% to 0.8%.  In Brazil, the economy is decelerating towards growth of just to 1.6% this year.  In Russia, real GDP will slow from 3.6% in 2012.   In India, the economy will grow 5.8% this year down from 6.9 % in 2011.  In China, GDP is expected to grow at 7.7% this year, below 8% for the first time this century. In Turkey, growth will slow to 2.2% this year.

In the US, large firms remain unwilling to invest, even when cash-rich, while small and medium-sized firms, a major source of job creation, cannot raise capital.  As private and public balance sheets are overstretched by excess leverage, banks increase their core capital and consumers deleverage. Until this process ends, growth will remain below potential.

And, as the graph below proves, the Great Recession was not the product of a collapse in consumer demand as the Keynesians argue, but a collapse in capitalist investment.  Personal consumption remains near its historic high at around 70% of GDP, while private investment fell from a peak of 18% of GDP to 11% and is still no higher than 14% now.

The US story is repeated even more starkly in the other capitalist economies.  As any reader of this blog will know, I consider that profits are the key indicator of the health of a capitalist economy.  Well, if you compare the mass of profits in the major economies compared to their peak level before the crisis,  capitalism remains in hospital, with the possible exception of the US.  US corporate profits are now 16% above their previous peak in late 2006, after falling 41% in the two years to end-2008.  But none of the other major economies have restored corporate profits to previous peaks.  UK corporate profits are still 3% below peak, Eurozone profits are flat and Japanese corporate profits are still down 21%, having fallen nearly 80% in the depth of the global slump.

Profits lead investment and investment leads employment and incomes.  As the mass of profits have not returned to previous peaks in most economies, real investment levels are well down.  Real investment fell 15-25% from their peaks before the Great Recession to the bottom.  The least fall was in the Eurozone, which also suffered the least fall in profits.  But there has been a very weak recovery since and in the case of the Eurozone a further deterioration.  Investment in the major economies remains under previous peaks in real terms and by as much as 15% for the UK, the Eurozone and Japan.

The long depression continues.