by Michael Roberts
The world economy continues to show significant signs of a
slowdown. Back in April 2018, I reckoned that the mini-boom of 2016-17
had peaked and the world economy would now descend into another Kitchin cycle downswing.
Moreover, this showed that nearly ten years from the end of the Great
Recession in mid-2009, the world economy was still stuck in a Long
Depression, or ‘secular stagnation’ (in Keynesian language).
Last
month, data showed that the German economy, the powerhouse of Europe,
had only narrowly avoided a ‘technical recession’ in the second half of
2018. This was partly caused by the global slowdown in the auto
sector due a sharp drop in demand along with restrictions on diesel car
emissions. Now in February, the EU Commission slashed its real GDP growth forecasts. The
Commission cut its Eurozone growth forecast for this year to 1.3% from
1.9% in its earlier forecast last autumn, citing “large uncertainty”
from Brexit negotiations, slowing growth in China and weakening global
trade. At the same time, the Bank of England cut its forecast for the
country’s economic outlook in the wake of greater uncertainty over
Brexit and a slowdown in global growth. The downgrade for 2019 growth
expectations to 1.2% is the weakest level in a decade. The Eurozone
growth rate for the last quarter of 2018 is already there.
The last week, we got the figures for UK real GDP growth at the end
of 2018. Real GDP growth was just 0.2% in Q4 2018 over the previous
quarter. Indeed, the industry and construction sectors actually
contracted. Manufacturing output has been shrinking for six months.
Real GDP growth year over year (ie from Q42017 to Q4 2018) has slowed to
just 1.2% (meeting the BoE forecast for 2019 already). This was the
slowest annual rate since 2012. UK business investment in new
technology, plant and equipment has also slumped badly – down for four
consecutive quarters and down nearly 4% yoy. As a percentage of GDP,
business investment has been falling for over three years. British
business is on an investment strike. The risk of an outright recession
in the UK this year has risen sharply.
What’s happening in the UK economy is not all due to uncertainty over
what happens with Brexit. It is also due to the global slowdown,
particularly in Europe and China. Japan is teetering on a recession,
with growth in the last quarter of 2018 at zero.
China’s growth rate continues to slow – if still far higher than anything in the advanced capitalist economies.
And, as I pointed out in a previous post, among the so-called
‘emerging economies’, emergence is being replaced by submergence. Real
GDP in Latin America as a whole is contracting on annualised basis,
according to investment bank JP Morgan.
But the key to whether this slowdown becomes an outright recession
(mainstream economics defines that as two consecutive quarterly declines
in real GDP) is what happens in the largest and most important
capitalist economy, the US. Up to now, the US has been the leader of
the pack, at least among the top G7 economies, with a real GDP growth
rate of 3% at the end of 2018.
But as many have argued, this growth rate is ‘fake news’ as President
Trump might put it. It has been driven by huge tax cuts for US
corporations that have boosted profits by up to 30% in the last year.
The impact of these will soon wear off in 2019. And it is already
happening. According to the forecast of the Atlanta Federal Reserve,
real GDP growth in the US will slow to just 1.5% in this current first
quarter of 2019.
This latest forecast was a huge drop from the already slower 2% than
Atlanta previously forecast. That was because of really bad retail
sales figures announced last week. These may have been distorted by the
US government shutdown in January and seasonal factors, but even so it
is clear that the US economy is beginning to join Europe, Asia and Latin
America in a significant downturn.
Actual nominal GDP has continued to weaken in the US, and even more so in Europe and Japan. The Long Depression continues.
In my view, there are two key factors that drive a capitalist
economy: 1) investment in the capitalist sector and 2) the profitability
of that investment. The latter decides the former, after a lag (according to empirical studies, usually a lag of about one year).
It seems that global investment is now stalling. JPMorgan investment
bank economists are signalling a significant slowdown in global
investment spending in the first quarter of 2019. “In sum, we have
worried for some time that the sustained slide in global business
confidence would translate into a meaningful deceleration in capex. This
appears to be happening now, especially following the tightening in
financial conditions in 4Q18. Indeed, the data we have in hand might not
reveal the full extent of this pullback.”
The JPM economists cite “business confidence” and “tightening
financial conditions”, by which they mean that companies are worried
about future profitability and sales alongside rising interest costs on
debt. Will the budding trade war between the US and China explode?
Will the Fed and other central banks continue to raise their policy
interest rates and thus ‘tighten’ financial conditions?
But rather than consider the psychology of capitalists, it is more
rewarding to consider the objective conditions, because the latter
informs the former. Globally, business investment has been in decline
(as a share of GDP) since the end of the Great Recession. This relative
decline has been led by the US and Europe.
It is often argued that investment to GDP is now lower because modern
corporations don’t need to invest so much in tangible assets like
equipment, offices and factories, because investment is now increasingly in ‘intangibles’,
like patents, ‘intellectual property rights’ and software (even
‘goodwill’). But the evidence for this conclusion remains highly
dubious. See Olivier Blanchard’s note on this here.
Then there is the argument that
companies like Apple, Google, Microsoft, Amazon etc have merely hoarded
their profits as cash or switched it into buying back their own shares
to improve the financial value of their companies and boost the top
executives bonuses. But this latter explanation, in my view, merely
confirms that the real reason for lower business investment to GDP is
that profitability of productive capital globally remains near post-war
lows and for most economies is still below the level reached in 2006 or
the late 1990s.
Here is the level of profitability of capital globally as calculated by Esteban Maito in our recent book, World in Crisis, Chapter 4.
And here is the secular decline in real GDP growth in the advanced
capitalist economies that accompanies the secular fall in profitability
(as calculated by Alan Freeman in a new paper.
The_sixty-year_downward_trend_of_economi)
And here is what has happened to the profitability of capital from
the beginning of the credit crunch in 2007 and the ensuing global
financial crash and Great Recession, followed by the weak recovery and
the Long Depression.
Over the whole period, Eurozone and US profitability is still below
the 2007 level, while UK profitability is virtually flat. Only Japan
shows a rise. In the ‘recovery’ period of 2010-18, profitability in the
US and the Eurozone failed to recover. But in the recent mini-boom,
there was some positive rise.
Actually, the big American tech companies (FAANGS)
are the exception that proves the rule. There are whole swathes of
smaller capitalist enterprises that are struggling to deliver enough
revenues and profits to service their debts even though interest rates
have remained way lower than before the global financial crash. I have
covered this issue of zombie companies in previous posts,
but the subject takes on an increasing relevance if ‘financial
conditions’, as JPM calls it, continue to tighten globally. Indeed,
according to another investment bank, Goldman Sachs, corporate sales
growth is now at its lowest rate (on a 10-year rolling basis) since
1945!
If sales growth is weak and interest costs rise, then profits will be
squeezed. Goldman’s economists note that since 2010, profit growth
outside the US has stalled. The only place where corporate earnings
have expanded is in the US. And this, according to Goldman’s is
entirely down to those super-tech companies. Global profits ex
technology are only moderately higher than they were prior to the
financial crisis, while technology profits have moved sharply upwards
(mainly reflecting the impact of large US technology companies), driven
by a combination of strong sales growth and sharply rising margins.
Global growth is set to slow sharply in 2019. This is because
business investment growth, already weak in the Long Depression, is
going to drop off further. In turn, that investment slowdown is driven
by low profitability in most economies and in most sectors. Only the
huge tech companies in the US have bucked this trend, helped by a recent
profits bonanza from the Trump tax ‘reforms’.
But as the effect of those handouts wear off this year, tech profits
may also head downwards – even if the US and China reach a trade deal.
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