Monday, July 8, 2013

Global Economy: The world is slowing

by Michael Roberts

There has been much talk of recovery picking up pace in the advanced capitalist economies but slowing down in the emerging economies, particularly China.  To get a more timely feel on the level of activity in the world economy, I use the purchasing manager’s indexes (PMIs).  These are monthly surveys compiled from companies in various countries on the state of production, employment, prices and orders, indexed up into a country by country figure.  The PMIs for June look like this.  These are PMIs for combined manufacturing and services sectors.
Anything over 50 implies that the economy is expanding.  In June, the only region still contracting was the Eurozone – still deep in recession.  But note that the Eurozone PMI is up from the figure in April.  So it would appear that the the rate of the Eurozone’s contraction is slowing – a small mercy.  Everywhere else, there is expansion.  However, the PMI data confirm that China and thus the World as a whole is expanding but at a slower rate than in April.  And that also applies to the US.   The US economy is still growing but according to the PMI at a slightly slower pace than in April.

The interesting development is that there has been a pick-up in the pace of expansion since April in the UK and Japan.  This would seem to confirm that the fear of a ‘triple-dip’ or ‘double-dip’ recession in the UK was unfounded.   Indeed, now all the economic forecasters are raising their guesses on UK expansion, including the IMF, from their dismal forecasts of a few months ago.  But just as the forecasters overdid their view on the UK to the downside, they are probably now swinging to be over-optimistic on the upside.  At best, UK GDP is going to grow by just 1% in real terms this year and even less per head of population.

And the world economy as a whole is slowing down in its expansion. driven by slower growth in China and the other major emerging capitalist economies.  Just as the very weak recovery in the advanced capitalist economies dragged down overall global growth between 2009-12, now it seems that the supposedly fast-growing emerging economies will dampen the impact of any relatively faster growth in the advanced economies.   In particular, the Chinese economy slowed to 7.7% a year in Q1-2012 from 7.9% at the end of 2012.  It is going to be even slower in the quarter just gone and through the rest of the year.  Of course, a real growth rate of 7%-plus is huge compared to the rest of the world, but it is not enough to absorb the flow of new labour into Chinese industry and services.  Elsewhere, Brazil, India and other major emerging economies are also slowing.

But it is the US economy that remains key to the health of the world capitalist economy – it remains the largest, the biggest trader and the dominant financial force.  And if we look at the US economy through the eyes of its combined manufacturing and services sector PMI, it remains stuck in a low-growth path, where it has been for almost the whole time since the end of the Great Recession.  If anything, the trend is for even slower growth going forward. COMBINED ISM JUNE
The more frequent but less reliable weekly indicator from ECRI tells the same story: the US has not achieved the usual economic recovery that comes after a slump.
Much has been made of the latest US jobs figures.  Employment rose 195,000 in June and after upward revisions for previous months, it seems that average employment growth is now 200,000 a month, higher than the less than 150,000 in the first quarter of this year.  But that increase has not made much of a dent in the unemployment rate because more Americans out of work have attempted to look for jobs after having given up for a while.  Indeed, the measure of long-term unemployment rose in June, from 13.8% to 14.3%—the highest level since February.  This suggests that new jobs are being snapped up by new claimants while those who lost their jobs in the Great Recession remain on the scrap heap, with their benefits being cut or expiring.

Moreover, just as in the UK, most of these new vacancies are not full-time permanent jobs at good wages, but part-time, low grade work. The number of people working part-time rose by 322,000 to 8.2 million. These people aren’t working part-time because they want to—it’s because they can’t find full-time work.  And of the  jobs created in June, 60% were in low-paying positions: 75,000 jobs were created in the leisure and hospitality sector and 37,000 jobs were created in the retail sector.  This will eventually translate into low or falling productivity in the US economy, just as it has done in the UK.  US corporations are taking advantage of the huge reserve army of labour still out there to introduce part-time and temporary jobs to save labour costs – reduced benefits, no holiday or sick pay etc.

Back in the UK, amid the new hope that the economy is about to burst forward at last, the latest data on UK corporate profitability were released with substantial revisions to the historic data.  In Q1-2013, non-financial corporations’ net return on capital stock, a pretty good measure of profitability, if not a la Marx, was 12%, slightly higher than the level of the last four years since the trough of the slump.  Manufacturing companies continued to achieve a much lower return at 8% on average.  So UK corporate profitability has improved a little from the slump, but it is still 20% below where it was at its peak in early 2008 and that was below its 1997 peak.

As I have shown in previous posts, this is the story of profitability in most capitalist economies, including the emerging economies.  A new slump may be necessary to ‘cleanse’ the capitalist economy of too much debt and too many inefficient ‘zombie’ companies.  As the leading global bond investment manager, PIMCO put it this week: “Statistically speaking, the global economy experiences a recession every six years or so, and the frequency of global recessions tends to increase when global indebtedness is high and falling as opposed to when indebtedness is low and rising. Given that the last global recession was four years ago, and also given that the global economy is significantly more indebted today than it was four years ago, we believe there is now a greater than 60% probability that we will experience another global recession in the next three to five years.”

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