World Economy: Still crawling way behind

By Michael Roberts

The IMF released its half-yearly report on the global economic outlook yesterday, just before its semi-annual meeting.  The IMF reduced again its forecast for global real GDP growth for this year to 2.9%, a cut of 0.3% pts from its July forecast and lowered its forecast for 2014 to 3.6% from its forecast of 3.8% last July.  It summed up the situation for the world capitalist economy in 2013 as “global growth is still weak, its underlying dynamics are changing and the risks to the forecast remain to the downside.”

Not great then.  What the IMF economists meant by ‘changing dynamics’  was that the slowing of growth was mainly in the so-called emerging economies, while there was a small relative pick-up in the advanced capitalist economies.  In particular, the UK economy was now expected to achieve 1.4% real GDP growth this year, sharply up from the IMF’s previous estimate of 0.9% last July.  But the IMF pointed out that “it would still take years for the UK economy to recover fully from the 2008 financial crisis.” Indeed, UK real GDP would still not return to pre-crisis levels even on this upgraded growth rate until the end of 2014, or seven years since the crisis began.  And of course, that would not be accompanied by any rise in average real incomes of households.  The average British household will still be worse off in 2018 than in 2008 – a lost decade.

Amid much recent talk that the Eurozone has ended its depression or double-dip recession, the IMF still expects a contraction in real GDP of about 0.4% this year and real growth of only 1% next year – which will have little or no impact on record high unemployment in most euro area economies.  As Olivier Blanchard, the IMF’s ‘economic counsellor’, put it: “In short, the recovery from the crisis continues, albeit too slowly,”.

There is much euphoria in the UK over the IMF’s higher forecast for real GDP growth. The right-wing City AM paper lambasted the IMF for being wrong again and again and being far too pessimistic about a recovery in the UK economy. “When the IMF came to the UK in April, it slammed the coalition’s austerity programme (misunderstanding its true extent, in fact quite limited), hinted at the need for more Keynesian measures and warned that George Osborne was “playing with fire”.  It appeared to back the Labour party’s stance – and as it turns out, was utterly mistimed. The IMF’s call for a u-turn came at exactly the moment when the economy had started to grow again; as so often with economic forecasts, a key turning point was completely missed…..Once again, the IMF had got it completely wrong, just as it didn’t predict the crisis and failed to see the bubble. It will fail again, and again, and yet we will continue to take what it says seriously.”

At the time, I also raised objections to the Keynesian/IMF argument that what was holding back the economies of the advanced capitalist world, especially the UK, was too much austerity (see my posts, http://thenextrecession.wordpress.com/2012/10/14/the-smugness-multiplier/ and http://thenextrecession.wordpress.com/2013/01/13/multiplying-multipliers/). 

And City Am is right about the failures of IMF forecasting. The IMF may have been too pessimistic about the UK earlier this year but it has been consistently too optimistic about the global capitalist economy recovering since the crisis began. Its own analysis of previous forecasts reveals just that in its latest report.  Back in October 2008, at the depth of the Great Recession, the IMF predicted that the world economy would return to ‘trend growth’ (the average rate of real GDP growth in the pre-crisis period) within two years and then race ahead (blue line in graph below).  Within six months, it predicted a much bigger fall in the global economy followed by a reasonably sharp recovery (red line).  Again that proved badly wrong.  Now it reckons that the world economy will not return to trend growth before 2018 – the furthest out it is prepared to go (light blue line).  And on the look of the graph, the world economy will never get back there!

As for the driver of the world economy up to now, the US, again the IMF got it all wrong.  Five years ago, it predicted that US economic growth would be some 6% points below its previous trend in 2013 (blue line) – pretty bad.  But even that was too optimistic.  It is now 11% points below its trend and the IMF now forecasts that the gap will not be bridged or even reduced right out to 2018 (light blue line).

In other words, the output lost by the Great Recession and the weak recovery will never be made up – it is a permanent waste engendered by the failure of capitalist production.

In the light of these forecasts, maybe City AM and other euphoric predictors of the ‘great’ UK economic recovery now under way with Conservative-Liberal austerity policies should be more cautious.  The IMF may well be too optimistic about UK real GDP growth reaching the heady heights of 1.9% next year.  This uptick in growth has been clearly based on the so-called services sector, particularly in financial and business services and in a new real estate bubble being engineered by the government’s ‘help to buy’ mortgage guarantee scheme augmented by the flood of money coming in from rich foreigners from Russia, Italy, Spain and Greece trying to ‘launder’ their cash by buying London property.  The productive sector of the UK economy remains in dire straits.  Productivity has collapsed and the industrial sector remains stagnant, according to the latest figures that again disappointed the optimists.

The profitability of UK manufacturing companies continues to fall, according to the very latest data and is now back at the level of 2003.

With the service sector rate of profit unmoved, the overall net return on capital for UK non-financial companies is still below that of 2011 and some 20% below its peak at the end of 1997.

No wonder business investment is making no recovery.