by Michael Roberts
At the weekend G20 meeting of finance ministers and central
bankers in Japan, the world’s finance leaders tried to put a brave face
on the situation. Tension over the intensifying trade war between China
and the US was the biggest talking point at the meetings. Officials
also wrangled over wording for a final communique on how to describe
their concerns for world growth. While they flagged that it appears to
be ‘stabilizing’, they also warned that the risks were tilted to the
downside. “Most importantly, trade and geopolitical tensions have
intensified. We will continue to address these risks, and stand ready to
take further action”, the communiqué said.
But where is this action to avoid a new global recession going to come from? The world’s central banks, it seems. “Central banks are heroes,” OECD Secretary General Angel Gurria told Bloomberg Television in an interview during the meetings. “The question is: how much armoury do they still have, how many bullets, particularly silver bullets?”
In other words, what monetary policy weapons do the major central
banks have left after ten years of keeping policy interest rates near or
even below zero, and after massive injections of money through
‘quantitative easing’, buying up all the debt of governments and
corporations from banks in order to encourage them to lend for
Well, we are about to find out in the US. The Federal Reserve led by
Jay Powell, having gradually raised its policy rate for the last four
years, is now indicating that it will reverse this policy and take its
rate down again in order to boost the American and world economy. Powell
told markets and the G20 ministers that the Fed stood ready to cut
interest rates, saying it would “act as appropriate to sustain the expansion”.
A put is financial jargon for betting on a rise in financial assets
in futures markets. In the mid-1990s the then Fed chair Alan Greenspan
reduced interest rates to boost the stock and property markets. The
Greenspan ‘put’ ‘took the stock market to a new peak in 2000, (but it
was followed by the huge ‘dot.com’ bust). We are about to have the
Powell put to do the same. Financial markets are now betting that the
Fed will cut rates and keep the cost of borrowing really low in order to
speculate further in financial markets. Jay Powell is set to be the new
Thus the fantasy world of financial markets
may be extended. But will cutting interest rates avoid a recession in
the ‘real’ economy? Everywhere the ‘hard data’ are showing a sharp
slowdown in economic growth, a collapse of the world car industry, and
outright slumps in many large so-called emerging economies. Above all,
there is a significant a contraction in world trade as the trade and
technology war instigated by the US against China hots up.
US economic growth had accelerated (from 2% to 3% a year) in 2018
after the Trump corporate tax cuts boosted profits – and unemployment
dropped to post-war lows. But last Friday’s May employment growth
figures were the lowest in years and wage growth that had been
accelerating also dropped off. So there are signs that Trumponomics has
been exhausted. Now Jay Powell must step up to the proverbial baseball
plate (after being ‘encouraged’ by Trump).
Elsewhere in the world, two key G7 economies continue to show a
significant slowdown in economic growth. German industrial production
plunged 1.9% from a month earlier in April. That was the biggest drop
in output since August 2015. Year-on-year, industrial production
dropped 1.8% over April 2018, following a 0.9% fall in March.
Manufacturing output dropped 3.4% over the year!. Both German exports
and imports fell. German growth is now the slowest in five years. As a
result, the German Bundesbank central bank cuts its GDP growth forecast
for this year to just 0.6%, down from 1.6% at the beginning of 2019.
At the same time,the G20’s host, Japan announced that wages had
fallen for the fourth consecutive month and overall household spending
slowed sharply. Unemployment, currently at record lows, was now set to
rise. And most important, China’s economic growth rate is at its lowest
level in over a decade – even if the rate of 6%-plus is around three
times the average in the rest of the G20 economies.
In its semi-annual report on Global Economic Prospects,
the World Bank cuts it forecast for global economic growth (that’s all
countries including China and India) for this year by 0.3% percentage
points to 2.6%. “There’s been a tumble in business confidence, a
deepening slowdown in global trade and sluggish investment in emerging
and developing economies,” said new (Trump-appointed) World Bank President David Malpass, “Momentum remains fragile.”
World trade growth is expected to fall to its lowest level since the
global financial crash of 2008. The bank also warned that risks are
skewed “firmly” to the downside, citing reignited trade
tensions between the U.S. and China, financial turbulence in emerging
markets and sharper-than-expected weakness in advanced nations,
particularly Europe. Hidden in the back of its report, World Bank
economists reckon that “A sharper-than expected deceleration of
activity in systemically large economies—such as China, the Euro Area,
and the United States—could also have broad ranging repercussions. The
probability of growth in 2020 being at least 1 percentage-point below
current projections is estimated at close to 20 percent. Such slowdown
would be comparable to the 2001 global downturn.”
Another sign that the world capitalist economy is turning sour is what’s happening in the smaller G20 economies. Growth in the Australian economy
fell to its weakest rate in almost a decade in the first three months
of this year. The economy grew by just 1.8 per cent year on year in the
first quarter, and down from 2.3 per cent year on year in the preceding
fourth quarter. This is Australia’s worst quarterly growth showing since
the end of 2009.
Among the so-called BRICS (Brazil, China, India, Russia and South Africa), it is looking even worse. The South African economy
is now suffering its worst slump in a decade. Output in Africa’s most
industrialised nation dropped by an annualised 3.2 per cent in the first
quarter, its largest quarterly fall since 2009. Power-intensive
industries such as manufacturing and mining recorded the biggest drops
in activity in the quarter. Mining activity fell by more than 10 per
cent while manufacturing dropped 8.8 per cent.
Turkey went into a recession earlier this year under Turkey’s Trump,
President Erdogan. Argentina was already in a slump in 2018 under the
governance of the right-wing administration of President Macri. The
country is now experiencing vicious austerity measures at the behest of
the IMF which is bailing out the Macro government with the biggest loans
in its history.
But the likely trigger of a new recession is the ongoing and intensifying trade and technology war between the US and China.
Neither side appears to be ready to back down and, as a result, world
trade growth is diving while there is the prospect of increased tariffs
and protectionist measures that will hit world growth. Bloomberg
economists reckon that if tariffs expand to cover all US-China trade in
the next few months, then global GDP will take a $600bn hit in
2021. With 25% tariffs on all bilateral trade, GDP would be down 0.8%
for China: 0.5% for the US and 0.5% for the world economy compared to no
trade war. That spells global recession.
And Trump seems bent on widening the trade war to other economies.
He has just temporarily delayed introducing a range of tariffs on
Mexican imports, including imports of car and car parts that American
companies make inside the Mexican border with the US. The world car
industry is already in major crisis driven by the end of diesel and
slowing demand in China, Europe and Japan. Now American car companies
face new problems with Trump’s plans.
Thus while financial markets may be set to boom with the Powell put,
that’s likely to have little effect on the struggling world economy.
The recovery since the Great Recession ended in mid-2009 has reached its
tenth year, making it the longest from a slump in 75 years. But it is
also the weakest recovery since 1945. Trend real GDP growth and
business investment remains well down from the rate before 2007.
The trade and technology war is settling in for the long haul.
What makes it likely that the trade war will not be resolved amicably
to avoid a global recession is that the battle between the US and China
is not just over ‘unfair trade’, it is much more an attempt by the US to
maintain its global technological superiority in the face of China’s
fast rise to compete. The attack on Huawei, globally organised by the
US, is just the start.
US investment bank Goldman Sachs has noted that, since 2010, the only
place where corporate earnings have expanded is in the US. And this,
according to Goldmans, is entirely down to the 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). And now it is just this sector that will suffer from the
The risk of a new recession, as measured by various methods,
continues to rise. Here is the New York Fed’s index of the probability
of a recession based on analysing financial market and economic data.
Then there is the supposedly reliable indicator of the inverted yield
curve in bond markets. Normally, the interest rate of long-term bonds
(ie 10 years or more) is much higher than the short-term interest (less
than one year). So the ‘curve’ of interest rates from 3m to 10 years is
up (or steep). But when the 10-year rate drops below the three-month
rate, this has invariably heralded a new recession within a year. Why?
Because it implies that investors are so worried about the future that
they want to hold ‘safe’ assets like government bonds rather than
invest, to the point that long-term interest rate on these bonds falls
below even the rate set by the Federal Reserve for short-term loans.
The yield on benchmark U.S. government bonds hit new 2019 lows near
2% before the G20 meeting. Yields on 10-year bonds in both Germany and
Japan were below zero! About $11 trillion of bonds around the world,
concentrated in Europe and Japan, carry negative yields, now account for
about 20% of all debt world-wide.
And US yield curve has now inverted. The inversion has only just
happened and it needs to continue for a few months to justify its
reliability as a recession indicator. So watch this space. Maybe the
central bank heroes can save the day.