by Michael Roberts
The latest economic data are showing that economic growth in the
major capitalist countries has been picking up in the first half of
Japan’s economy expanded at the fastest pace for more than two years
in the three months to June, with domestic spending accelerating as the
country prepares for the 2020 Tokyo Olympics.
In the Eurozone, real GDP growth rose at annualised rate of 2.5%,
with the Visegrad countries of Czech, Poland, Hungary and Slovakia
rising at 5.8% in the second quarter of this year.
With the US economy continuing to trundle along at just over a 2% a
year growth, the major economies are looking a little brighter in growth
terms, it seems – at least compared to the falling growth rates of
What has been the key reason for this slight improvement? In my
view, it is the relative recovery in the Chinese economy, considered by
most observers and the evidence as the driver of world economic growth
(at the margin) since 2007. As the IMF put it in its latest survey of
the Chinese economy, “With many of the advanced economies of the west struggling in the years since the financial crisis of 2007-09, China has acted as the growth engine of the global economy, accounting for more than half the increase in world GDP in recent years.”
Manufacturing output in China increased 6.7% yoy in July, continuing a
slight recovery in 2017 after reaching a low in 2016 from a peak of
over 11% a year in 2013. As a result, Eurozone manufacturing output has
picked up, particularly in Germany, the Netherlands and Italy as they
export more to China. The US manufacturing sector has also reversed its
actual decline in 2016. Japan’s manufacturing sector leaped up 6.7%
compared to 2016, led by construction demand for the Olympics.
This all looks much better. But remember most of these major
economies are still growing at only around 2% a year, still well below
pre-2007 rates or even the average in the post-1945 period. The
‘developed’ capitalist economies are growing at their slowest rate in
decades. Ruchir Sharma, chief global strategist and head of emerging
markets at Morgan Stanley Investment Management, noted in a recent essay in the magazine Foreign Affairs that “no
region of the world is currently growing as fast as it was before 2008,
and none should expect to. In 2007, at the peak of the pre-crisis boom,
the economies of 65 countries – including a number of large ones, such
as Argentina, China, India, Nigeria, Russia and Vietnam – grew at annual
rates of 7% or more. Today, just six economies are growing at that
rate, and most of those are in small countries such as Côte d’Ivoire and
Nevertheless, all the purchasing managers indexes (PMIs) that provide
the best ‘high frequency’ guide to the attitude and confidence of the
capitalist sector in each country all show expansion is still taking
place – if not at the pace of 2013-14. Again the key seems to be a
recovery in China’s PMI.
What does all this tell us about the likelihood of a new global
economic recession in the next year or two? That is something that I
have been forecasting or expecting. The latest data would seem to point
away from that.
The mainstream forecasters remain optimistic about growth with the
only proviso being that it is China that might collapse. The IMF survey
makes the familiar argument of the mainstream that overall debt is so
high that it will eventualy collapse in bankruptcies and defaults,
causing a slump and weakening the world economy. Total debt has
quadrupled since the financial crisis to stand at $28tn (£22tn) at the
end of last year.
I disagree: for two reasons. First, when China’s growth slowed
sharply at the beginning of 2016, the mainstream observers argued that
China could bring the world economy down. My view was that, important
as the Chinese economy was, it was not large enough to take the US and
Europe down. Those advanced economies remained the key to whether there
would be a world slump. And so it has proved.
Second, the size of China’s debt is large but the Chinese economy is
different from the advanced capitalist economies. Most of that debt is
owed by the Chinese state banks and state enterprises. The Chinese
government can bail these entities out using its reserves and forced
savings of Chinese households. The state has the economic power to
ensure that, unlike governments in the US and Europe during the credit
crunch of 2007. Governments then were beholden to the capitalist banks
and companies, not vice versa. So any credit crisis in China will be
dealt with without producing a major collapse in the economy, in my
So does this mean that a new world slump is off the agenda? No, in
short. One of my key indicators of the health of capitalist economies,
as the readers of this blog well know, is the movement of profits in the
capitalist sector. Global corporate profits (a weighted average of the
major economies) have also made a significant recovery from their
collapse at the end of 2015. Indeed corporate profits overall seem to
rising at the fastest rate since the immediate bounce-back after the end
of the Great Recession.
But this overall figure is driven by the Chinese recovery and the
pickup in Japan (due to the Olympics construction?). Corporate profit
growth in the US, Germany and the UK is slowing again after a brief
pick-up in late 2016.
For me, the key remains the state of US economy and in particular, profits and investment levels there.
The booming US stock market is now way out of line with corporate
earnings levels. The S&P 500 cyclically adjusted price-to-earnings
(CAPE) valuation has only been higher on one occasion, in the late
1990s. It is currently on par with levels preceding the Great
US corporate profits have recovered in the last few quarters after
declining (although now slowing again) and, along with that, business
investment has picked up. Watch this space over the rest of 2017 to see
if this is sustained.
Total domestic corporate profits have grown at an annualized rate of
just 0.97% over the last five years. Prior to this period five-year
annualized profit growth was 7.95%. At $8.6 trillion, corporate debt
levels are 30% higher today than at their prior peak in September 2008.
At 45.3%, the ratio of corporate debt to GDP is at historic highs,
having recently surpassed levels preceding the last two recessions. If
there is an issue with the level of debt, it is in the US, not in China.