World economy: Recovery, recession or depression?

by Michael Roberts

The latest World Bank report on global economic prospects (GEP13AFinalFullReport) makes grim reading for the world economy.  The bank reckons that the global economy will grow just 2.4% this year – that’s the whole world including Asia, China and the faster-growing developing capitalist economies.  That’s more or less the same growth achieved in 2012.  The bank expects a pick-up to 3.3% in 2014, but we’ll see, as it has revised down its forecasts every year.  Last June, it expected 3% world growth this year.

As for the US, it expects only 1.9% real growth this year and 1.1% for the UK, well below most consensus forecasts, while it expects the Eurozone to remain in recession.  So the World Bank expects the US to grow more slowly this year than last year.  Only China, of the major economies, is expected to have faster growth in 2013 (8.4%) over 2012 (7.9%).  Indeed, the so-called developing capitalist economies grew only 5.1% in 2012 as a whole, the slowest growth in a decade.

I had a look at the world Bank’s data on global economic growth going back to 1960.  It reminded me that the Great Recession really was great.  Global real GDP contracted in 2009 by 2.2%, the only year that there has been a contraction since 1960!  Even the steep recession of 1982 still saw a small rise in world GDP.  And it rose over 1% in the first worldwide post-war recession of 1974.

Of course, per capita real GDP (which takes into account any increase in world population) did contract in those earlier recessions, but the fall in per capita real GDP in 2009 was more twice that in 1982.

And when we come to the largest capitalist economy, the US, the data show the same thing.  Doug Short in his excellent blogsite on US data follows four key indicators for the health of the US economy: industrial production, retail sales, employment and personal incomes (http://advisorperspectives.com/dshort/updates/Big-Four-Economic-Indicators.php).  Short finds that  the Great Recession was truly great for the US economy with an average fall in his composite average of these indicators of over 10%, nearly twice as large as the fall in 1974-5.

And if we look more closely at the Great Recession in the US and the subsequent recovery, Short finds that there has been a significant recovery since the trough in 2009, but there is still a long way to go to get back to the previous high.  Now you could argue, as some do, that such was the drop in the Great Recession, it will take longer to get back than in previous recessions.  Sure, but at the current rate of recovery, that could be another three years, making eight years from peak to peak.  And Short found signs that the pace of recovery in 2012 was already fading.  As Bruce Springsteen put it in his last album, Wrecking Ball, on the track, This Depression, “we have been down, but never this down.”

And if we drill down to the productive sectors of the US economy like industrial production, we can see slowing growth.  It’s not a return to recession, but recovery is giving way to long-term depression.

And, as I have shown on many previous occasions, the recovery in employment from the trough of the Great Recession has been particularly weak in the US – a so-called jobless recovery (relative to previous recoveries from recessions).

If the US recovery is weak compared to previous ones, it’s still a lot better than the Eurozone.  After all, US real GDP in 2012 was 7% above its 2006 level, while in the Eurozone, it was up only 2%; although it’s probably fairer to compare real GDP with the last peak in late 2007 – in that case US real GDP is just 2.5% higher than over five years ago.

Paolo Manasse in (17 January 2013, http://www.voxeu.org/article/eurozone-crisis-it-ain-t-over-yet) looked at the differences between the US and Eurozone recoveries.  He found that the government deficit in the US rose much more than in the Eurozone, 12 versus five percentage points of GDP from peak to trough.  He argues that this shows the policies of austerity were applied more in the Eurozone and thus explains the worse recovery.

Maybe so, but the other side of the coin is that the US government debt ratio to GDP has risen much more, providing serious problems down the road for US growth, in my view.

In a private report, economists at the US investment bank, Morgan Stanley, looked at the state of public finances in the major capitalist economies and argued that financing existing debt and future additions would become a significant burden on the profitability and growth of the private sector.
Capitalist governments will be faced with two alternative policies to austerity.  The first would be defaulting on their debts to the private sector, as in Greece.  That’s the ‘solution’ of the Austrian school of economics – getting rid of ‘excessive’ debt.  Or they can force down interest rates on debt to keep costs low and hope the economy recovers in the meantime (financial repression, it’s called).  That’s the Keynesian solution.  But that solution means no profit for those who invest in government bonds or are ‘encouraged’ to do so by governments.

Both these ‘solutions’ mean that governments will not honour their debts in one way or another, in order that the future burden of higher taxation on the productive sectors of capitalism can be reduced.  But these solutions are anathema to the finance sector which holds the bulk of government debt.  They prefer all government debts to be honoured and to be paid for, either by the productive sectors meeting the bill or, better still, working people paying more taxes and having less services and welfare.

So the austerity stays dominant right now.  Default would mean a new recession.  But financial repression would mean low growth for a long time because it assumes that the productive private sector will somehow shake off the burden of its own debt to the financial sector as well as the constraint of relatively low profitability -  and so restore growth.