by Michael Roberts
As I write the coronavirus epidemic (not yet declared pandemic)
continues to spread. Now there are more new cases outside China than
within, with a particular acceleration in South Korea, Japan and
Iran. Up to now more than 80,000 people infected in China alone, where
the outbreak originated. The number of people who have been confirmed to
have died as a result of the virus has now surpassed 3,200.
As I said in my first post on the outbreak, “this
infection is characterized by human-to-human transmission and an
apparent two-week incubation period before the sickness hits, so the
infection will likely continue to spread across the globe.” Even
though more people die each year from complications after suffering
influenza, and for that matter from suicides or traffic accidents, what
is scary about the infection is that the death rate is much higher than
for flu, perhaps 30 times higher. So if it spreads across the world, it
will eventually kill more people.
And as I said in that first post, “The coronavirus outbreak may
fade like others before it, but it is very likely that there will be
more and possible even deadlier pathogens ahead.” That’s because
the most likely cause of the outbreak was the transmission of the virus
from animals, where it has probably been hosted for thousands of years,
to humans through use of intensive industrial farming and the extension of exotic wildlife meat markets.
COVID-19 is more virulent and deadly than the annual influenza
viruses that kill many more vulnerable people each year. But if not
contained, it will eventually match that death rate and appear in a new
form each year. However, if you just take precautions (hand washing,
not travelling or working etc) you should be okay, especially if you are
healthy, young and well-fed. But if you are old, have lots of health
issues and live in bad conditions, but you still must travel and go to
work, then you are at a much greater risk of serious illness or death. COVID-19 is not an equal-opportunity killer.
But the illnesses and deaths that come from COVID-19 is not the worry
of the strategists of capital. They are only concerned with damage to
stock markets, profits and the capitalist economy. Indeed, I have heard
it argued in the executive suites of finance capital that if lots of
old, unproductive people die off, that could boost productivity because
the young and productive will survive in greater numbers!
That’s a classic early 19th century Malthusian solution to any crisis
in capitalism. Unfortunately, for the followers of the reactionary
parson Malthus, his theory that crises in capitalism are caused by
overpopulation has been demolished, given the experience of the last 200
years. Nature may be involved in the virus epidemic, but the number of
deaths depends on human action – the social structure of an economy;
the level of medical infrastructure and resources and the policies of
governments.
It is no accident that China, having been initially caught on the hop
with this outbreak, was able to mobilise massive resources and impose
draconian shut-down conditions on the population that has eventually
brought the virus spread under control. Things do not look so
controlled in countries like Korea or Japan, or probably the US, where
resources are less planned and governments want people to stay at work
for capital, not avoid getting ill. And poor, rotten regimes like Iran
appear to have lost control completely.
No, the real worry for the strategists of capital is whether this
epidemic could be the trigger for a major recession or slump, the first
since the Great Recession of 2008-9. That’s because the epidemic hit
just at a time when the major capitalist economies were already looking
very weak. The world capitalist economy has already slowed to a near ‘stall speed’ of about 2.5% a year.
The US is growing at just 2% a year, Europe and Japan at just 1%; and
the major so-called emerging economies of Brazil, Mexico, Turkey,
Argentina, South Africa and Russia are basically static. The huge
economies of India and China have also slowed significantly in the last
year. And now the shutdown from COVID-19 has pushed the Chinese economy
into a ravine.
The OECD – which represents the planet’s 36 most advanced economies – is now
warning of the possibility that the impact of COVID-19 would halve
global economic growth this year from its previous forecast. The OECD lowered its central growth forecast from 2.9 per cent to 2.4 per cent, but said a “longer lasting and more intensive coronavirus outbreak”
could slash growth to 1.5 per cent in 2020. Even under its central
forecast, the OECD warned that global growth could shrink in the first
quarter. Chinese growth is expected to fall below 5% this year, down
from 6.1% last year – which was already the weakest growth rate in the
world’s second largest economy in almost 30 years. The effect of
widespread factory and business closures in China alone would cut 0.5
percentage points from global growth as it reduced its main forecast to
2.4 per cent in the quarter to end-March.
Elsewhere, Italy endured its 17th consecutive monthly decline in
manufacturing activity in February. And the Italian government announced
plans to inject €3.6bn into the economy. IHS Markit’s purchasing
managers’ index for Italian manufacturing edged down by 0.2 points to
48.7 in February. A reading below 50 indicates that the majority of
companies surveyed are reporting a shrinking of activity. And the survey
was completed on February 21, before the coronavirus outbreak
intensified in Italy. There was a similar contraction of factory
activity in France, where the manufacturing PMI fell by 1.3 points to
49.8. However, manufacturing activity increased for the eurozone as a
whole in February, as the PMI for the bloc rose by 1.3 points to 49.2,
but still under 50.
The US, so far, has avoided a serious downturn in consumer spending,
partly because the epidemic has not spread widely in America. Maybe the
US economy can avoid a slump from COVID-19. But the signs are still
worrying. The latest activity index for services in February showed that
the sector showed a contraction for the first time in six years and the
overall indicator (graph below) also went into negative territory.
Outside the OECD area, there was more bad news on growth. South
Africa’s Absa Manufacturing PMI fell to 44.3 in February of 2020 from
45.2 in the previous month. The reading pointed to the seventh
consecutive month of contraction in factory activity and at the quickest
pace since August 2009. And China’s capitalist sector reported its
lowest level of activity since records began. The Caixin China General
Manufacturing PMI plunged to 40.3 in February 2020, the lowest level
since the survey began in April 2004.
The IMF too has reduced its already low economic growth forecast for 2020. “Experience
suggests that about one-third of the economic losses from the disease
will be direct costs: from loss of life, workplace closures, and
quarantines. The remaining two-thirds will be indirect, reflecting a
retrenchment in consumer confidence and business behavior and a
tightening in financial markets.” So “under any scenario,
global growth in 2020 will drop below last year’s level. How far it will
fall, and for how long, is difficult to predict, and would depend on
the epidemic, but also on the timeliness and effectiveness of our
actions.”
One mainstream economic forecaster, Capital Economics, cut its growth
forecast by 0.4 percentage points to 2.5 per cent for 2020, in what the
IMF considers recession territory. And Jennifer McKeown, head of
economic research at Capital Economics, cautioned that if the outbreak
became a global pandemic, the effect “could be as bad as 2009, when world GDP fell by 0.5 per cent.” And a global recession in the first half of this year is “suddenly looking like a distinct possibility”, said Erik Nielsen, chief economist at UniCredit.
In a study of a global flu pandemic, Oxford University professors
estimated that a four-week closure of schools — almost exactly what
Japan has introduced — would knock 0.6 per cent off output in one year
as parents would have to stay off work to look after children. In a 2006
paper, Warwick McKibbin and Alexandra Sidorenko of the Australian
National University estimated that a moderate to severe global flu
pandemic with a mortality rate up to 1.2 per cent would knock up to 6
per cent off advanced economy GDP in the year of any outbreak.
The Institute of International Finance (IIF), the research agency
funded by international banks and financial institutions, announced
that: “We’re downgrading China growth this year from 5.9% to 3.7%
& the US from 2.0% to 1.3%. Rest of the world is shaky. Germany
struggling to retool autos, Japan weighed down by 2019 tax hike. EM has
been weak for a while. Global growth could approach 1.0% in 2020,
weakest since 2009.”
What are the policy reactions of the official authorities to avoid a
serious slump? The US Federal Reserve stepped in to cut its policy
interest rate at an emergency meeting. Canada followed suit and others
will follow. The IMF and World Bank is making available about $50
billion through its rapid-disbursing emergency financing facilities for
low income and emerging market countries that could potentially seek
support. Of this, $10 billion is available at zero interest for the
poorest members through the Rapid Credit Facility.
This may have some effect, but cuts in interest rates and cheap
credit are more likely to end up being used to boost the stock market
with yet more ‘fictitious capital’ – and indeed stock markets have made a
limited recovery after falling more than 10% from peaks. The problem
is that this recession is not caused by ‘a lack of demand’, as Keynesian
theory would have it, but by a ‘supply-side shock’ – namely the loss of
production, investment and trade. Keynesian/monetarist solutions won’t
work, because interest rates are already near zero and consumers have
not stopped spending – on the contrary. Jon Cunliffe, deputy governor of
the Bank of England, said that since coronavirus was “a pure supply shock there is not much we can do about it”.
And as British Marxist economist Chris Dillow argues,
the coronavirus epidemic is really just an extra factor keeping the
major capitalist economies dysfunctional and stagnating. He lays the
main cause of the stagnation on the long-term decline in the
profitability of capital. “basic theory (and common sense) tells us
that there should be a link between yields on financial assets and those
on real ones, so low yields on bonds should be a sign of low yields on
physical capital. And they are.” He identifies ‘three big facts’:
the slowdown in productivity growth; the vulnerability to crisis; and
low-grade jobs. And as he says, “Of course, all these trends have
long been discussed by Marxists: a falling rate of profit; monopoly
leading to stagnation; proneness to crisis; and worse living conditions
for many people. And there is plenty of evidence for them.” Indeed, as any regular reader of this blog will know.
And then there is debt. In this decade of record low interest rates
(even negative), companies have been on a borrowing binge. This is something that I have banged on about in this blog ad nauseam.
Huge debt, particularly in the corporate sector, is a recipe for a
serious crash if the profitability of capital were to drop sharply.
Now John Plender in the Financial Times has taken up my argument. He
pointed out, according to the IIF, the ratio of global debt to gross
domestic product hit an all-time high of over 322 per cent in the third
quarter of 2019, with total debt reaching close to $253tn. “The
implication, if the virus continues to spread, is that any fragilities
in the financial system have the potential to trigger a new debt
crisis.”
The huge rise in US non-financial corporate debt is particularly
striking. This has enabled the very large global tech companies to buy
up their own shares and issue huge dividends to shareholders while
piling up cash abroad to avoid tax. But it has also enabled the small
and medium sized companies in the US, Europe and Japan, which have not
been making any profits worth speaking of for years to survive in what
has been called a ‘zombie state’; namely making just enough to pay their
workers, buy inputs and service their (rising) debt, but without having
anything left over for new investment and expansion.
Plender remarks that a recent OECD report says that, at the end of
December 2019, the global outstanding stock of non-financial corporate
bonds reached an all-time high of $13.5tn, double the level in real
terms against December 2008. “The rise is most striking in the US,
where the Fed estimates that corporate debt has risen from $3.3tn before
the financial crisis to $6.5tn last year. Given that Google parent
Alphabet, Apple, Facebook and Microsoft alone held net cash at the end
of last year of $328bn, this suggests that much of the debt is
concentrated in old economy sectors where many companies are less cash
generative than Big Tech. Debt servicing is thus more burdensome.”
The IMF’s latest global financial stability report amplifies this
point with a simulation showing that a recession half as severe as 2009
would result in companies with $19tn of outstanding debt having
insufficient profits to service that debt.
So if sales should collapse, supply chains be disrupted and
profitability fall further, these heavily indebted companies could keel
over. That would hit credit markets and the banks and trigger a
financial collapse. As I have shown on several occasions, the
profitability of capital in the major economies has been on a downward
trend (see graph above from Penn World tables 9.1).
And the mass of global profits was also beginning to contract before
COVID-19 exploded onto the scene (my graph below from corporate profits
data of six main economies, Q4 2019 partly estimated). So even if the
virus does not trigger a slump, the conditions for any significant
recovery are just not there.
Eventually this virus is going to wane (although it might stay in
human bodies forever mutating into an annual upsurge in winter cases).
The issue is whether the ‘supply shock’ is so great that, even though
economies start to recover as people get back to work, travel and trade
resumes, the damage has been so deep and the time taken so long to
recover, that this won’t be a quick one-quarter, V-shaped economic
cycle, but a proper U-shaped slump of six to 12 months.
If you have opinions about the subject matter of posts on this blog please share them. Do you have a story about how the system affects you at work school or home, or just in general? This is a place to share it.
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