Monday, December 31, 2012

The world economy: prospects for 2013

by Michael Roberts

When I sat down to write this post on the prospects for the world economy in 2013, I thought I’d better check back to see what I said this time last year about 2012.  After all, economic forecasting has a well-deserved, terrible reputation for inaccuracy. It’s mostly useless, or at least mainstream economics is pretty hopeless at it. There is no space in this post to explain the reasons why – maybe another time.

But anyway, when I read my post on 2012, it seemed to me that the analysis would hardly change for 2013.  So I thought I would repeat the points made at the end of December 2011 and then comment on the differences (if any) now.

I started last year by saying that “2011 was a pretty awful year for the major capitalist economies.”  Last year, I forecast that 2012 compared to 2011 would look “little better, except maybe for the US and Japan – relatively.”

Well, that was broadly right except that Japan performed worse than I expected. Most forecasters were less optimistic about 2012, especially as several thought that the Eurozone would break up before the end of 2012. And 2012 was indeed pretty awful for world capitalism. World economy growth was just 3.5% in real terms, hardly enough to stop unemployment in industry and services rising. In the major advanced capitalist economies, the US grew best at 2% while the bulk of Europe and Japan performed worse than in 2011, with the core of Europe failing to grow by more than 2% while southern Europe entered a depression with little sign of recovery.

As for emerging economies, I commented last December that “the large emerging economies of India, Brazil, South Africa and China are also slowing fast.  India is now growing at only 5% a year, down from 9% at the beginning of 2011, China is slipping towards 7% from 10%, while Brazil has dropped back under 4%.  These growth rates are still much higher than the mature capitalist economies, but given that the emerging economies need to absorb a massive influx of agricultural peasants into the cities for urban employment, the emerging economies need to grow faster in order to create sufficient jobs.” Well, 2012 continued that record. Indeed, it was even worse than expected for the so-called BRIC economies of Brazil and India.

In 2012, unemployment rates fell slightly over 2011 in the US and the UK, but in most of Europe they were worse and youth unemployment continues to hit new highs in most countries. Moreover, the most worrying development was that long-term unemployment has never been higher since the Great Depression. If you lose your job, your chances of getting another have never been so bad. Indeed, in the US, the average length of time without a job for those seeking one is at an all-time record high. The ‘reserve army of labour’ stays constantly large.

Just as I said this time last year, “since the trough of 2009, the major capitalist economies have generally failed to achieve even their former long-term average growth rates and some of them are still contracting.” By the end of 2012, several key capitalist economies had still not got back to their peaks prior to the crisis at end-2007, five years ago.

In last year’s post, I cited two key reasons why capitalism has not recovered ‘normally’ after the Great Recession of 2008-9. The first was that “the rate of profit in the largest and most important capitalist economy, the US, is still in its downward phase…Since US profitability peaked in 1997, that rate has not been surpassed… That has reduced the incentive of the productive sectors of capitalism (manufacturing, transport and services), at least in the advanced capitalist economies, to make new investments and employ more labour over the period since 1997 compared to the period 1982-97.”
That reason was further confirmed in 2012. Rates of profit in the major economies remain below the level reached in 2007, while the level of the mass of profit is still well below the previous peaks. In the US, in 2012, the rate of profit was broadly flat compared to 2011. And that is despite the continued rise in the mass of corporate profits to near record highs, depending of how you measure it.

The failure of profitability to return to previous levels has dampened any recovery in business investment, which is the key to sustained recovery. So, although labour ‘compensation’ as a share of GDP has fallen to a 50-year low to boost profits and increase inequality, there is still no move out of this Long Depression.

I had expected the US rate of profit to fall in 2012. Instead it has stagnated mainly because of this extraordinary rise in the rate of exploitation. But here is a forecast (!). This is unlikely to continue in 2013. Already US corporate profit growth is slowing. Raising the rate of exploitation will not be sufficient to support profitability in 2013. The US rate of profit will fall in the coming year.
I repeat what I said about 2012, “that does not mean a new economic slump (yet)”. I argued that “the history of US capitalism since 1945 suggests that, as the corporate rate of profit falls, eventually the overall mass of profit will peak and fall back. But it can take a lag of some three years or so. That suggests a new crisis of production in the US around 2014 onwards – but not yet.” That’s my key forecast again (help!).

The experience of 2012 confirmed my view that capitalism is really in a long depression similar to that of the 1880s and 1890s that is different from the ‘normal’ cycle of slump and recovery experienced say in the crisis period of 1965-82 or in the ‘boom’ period of so-called neo-liberalism of 1982-97.  I expect 2013 to do the same.

The other major reason for the continued depression “is to be found in the proximate cause of the Great Recession, namely the huge rise in debt or credit (or what Marx called fictitious capital) that delayed the underlying crisis in capitalist production and stimulated the unprecedented bubble in housing and property in the US and elsewhere.”

Some of this debt has been ‘deleveraged’ or liquidated over the last four years. In 2012, US household net wealth recovered in nominal terms (although in real terms, it is still well below that of 2007). The main reason was a reduction in debt (mortgage defaults) and a recovery in share prices (although that mainly benefits the rich).

While private sector debt (corporate and household) as a share of GDP fell, public sector debt ratios rose again in 2012. Since peaking in 2007, US household debt to GDP has fallen 7%, corporate debt is static, but government debt to GDP has jumped 50%. Debt owed to foreigners has also risen, so overall debt has actually risen by 9%. So some deleveraging in the capitalist sector but none overall.
The big debate among mainstream economists in 2012 was whether the policy of austerity adopted in varying degrees by governments was working to cleanse the economy of debt, or instead was making things worse. I covered this question in many posts during 2012. Those governments that adopted more severe austerity saw their economies do generally worse than those that were a little less draconian. But it was marginal. What drove the likes of Spain or Japan in 2012 into slump was not policies of austerity. In the case of the former, fiscal cliffs have only just started to be employed. In the case of the latter, fiscal expansion not austerity is on the agenda of the new conservative government.

But austerity will not go away because it is a necessary part of capitalist economic policy, not just a mad ideological binge, as Keynesians like to argue. As I said, this time last year, “Any increase in government spending begins to encroach on the private sector’s ability to make profit, both through increased taxation and also through competing with the private sector in various areas of investment. Of course, pro-capitalist governments bend over backwards to reduce that burden through cutting corporate taxes (and shifting the burden of taxation onto households and onto any spending by households). …But even so, over the long term, if government debt keeps rising or does not fall, it will become an albatross around the capitalist sector, reducing its ability or willingness to invest.  That is why debt matters, contrary to the view of the Keynesians, who see government spending (through borrowing or not) as the way out of recession.  “

To sum up, in 2013, economic growth in the major economies is likely to be much the same as in 2012 – pretty weak and below long-term averages. But 2013 is not likely to see a return of a big slump in capitalism. I do not expect the US to grow faster than in 2012 and Europe and Japan will struggle to grow at all. The key emerging economies may do a little better than in 2012, as China’s state-directed economy under new leaders invests more. But on the whole, it will be another poor year.  It’s going to take another nasty slump to get capital (both real and fictitious) looking ‘mean and lean’.  So the Long Depression will enter its sixth year with no prospect of respite yet. We are in uncharted waters.

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