So here we are starting 2014 and heading towards seven full years since the global credit crunch began in summer 2007 and into the fifth year since the summer of 2009 when the Great Recession reached its trough and the global economic recovery began. What I said more or less at this time last year was:
In 2013, economic growth in the major economies is likely to be much the same as in 2012 ? pretty weak and below long-term averages. But 2013 is not likely to see a return of a big slump in capitalism. I do not expect the US to grow faster than in 2012 and Europe and Japan will struggle to grow at all. The key emerging economies may do a little better than in 2012, as China?s state-directed economy under new leaders invests more. But on the whole, it will be another poor year.
And so it has turned out more or less, even with the US economy. US average annual real GDP growth (including the Great Recession and an estimate for 2013) has been just 0.9% compared to 2.4% in the years before 2007 and way below the average real growth of the 1980s and 1990s.
Even though each year of recovery since 2009 has disappointed the expectations and forecasts of mainstream economics (see my last post), optimism reigns again among economic forecasters that 2014 will finally see a pick-up in real GDP growth in the major economies leading to a sustained improvement in incomes and employment for the majority of people. For example, according to Deutsche Bank, 2014 will be the year that US growth tops 3%, with 3.8% in 2015. And the great vampire squid of them all, Goldman Sachs, reckons that ?the US economy (will) accelerate to an above-trend growth pace in 2014? and its economists outline the reasons why: ?The acceleration is likely to be led by faster growth in personal consumption and business capital spending, with continued support from housing.?
Well, let?s consider how those components of US economic growth have been doing up to now. Much has been made in the media of the 4.1% annualised growth rate for the US in the third quarter of 2013. That is the fastest rate in nearly two years. But much of this increase came from businesses increasing their inventories ? meaning they?ve bought products from suppliers that there may or may not be demand for in the marketplace. Without this increase in inventories, the GDP rate would be in line with average growth since the economic recovery commenced in the second quarter of 2009. Also, consumer spending growth, 1.5% in the third quarter, continues to slip from 1.8% in the second quarter and 2.3% in the first, while business spending on equipment and software actually fell at a 3.7% annual rate for only the second time since the recovery started in mid-2009.
Gary Shilling has analysed this 2.3% average real GDP growth for the US in the recovery. It totals an accumulated 10% since the summer of 2009.
Consumer spending accounted for 65% of that growth of 10%, a little less than its actual share of GDP at 68%. Government spending fell. Residential construction (home building) accounted for 9% of the gain in the economy. Net trade deducted from real GDP growth by 0.4%. Most significant, inventory-building accounted for a substantial 19% of the rise in real GDP. While it?s true that business investment contributed 25% of the 10% rise in real GDP, clearly that was not enough to get the economy going stronger. And this figure includes the dubious new addition by the official statisticians of ?intellectual property products? or software.
The labour market remains weak. The unemployment rate has been falling, but mainly because of the declining labour participation rate. For 16-24-year-olds, the rate of participation has declined sharply since 2000 as young people opt to stay in school or otherwise give up looking for work.
And as I have recorded before, there is a large number of people who want to work full-time but are only offered part-time positions ? some 8 million and 5.6% of the employed.
In addition, most new jobs are in low-paid sectors like leisure and hospitality, retailing and fast food, which accounted for a third of the 204,000 new jobs in October. Around 60% of the jobs lost during the last recession were mid-wage jobs, but 58% of the jobs created since then have been low wage jobs. Approximately one-fourth of all American workers make $10 an hour or less. According to the Working Poor Families Project, ?about one-fourth of adults in low-income working families were employed in just eight occupations, as cashiers, cooks, health aids, janitors, maids, retail salespersons, waiters and waitresses, or drivers.? The US actually has a higher percentage of workers doing low wage work than any other G7 economy.
As a result, real weekly wages are falling on average. The top 20% has done better, of course. Their average income has risen 6% since 2008 in real terms and the top 5% of earners had an 8% jump. But the bottom 29% are still below their pre-recession peak. None of this suggests a sharp rise in consumer spending next year. Indeed, real personal consumption growth continues to slow.
That?s not surprising when you find that a study of household incomes over the 2002-2012 decade shows that the top 0.01% gained 76.2% in real terms, but the bottom 90% lost 10.7%. In 2012, the top 1% by income got 19.3% of the total. The only year when their share was bigger was 1928 at 19.6%! Real median household income, that of the household in the middle of the spectrum, was down 8.3% from the pre-recession 2007 level and off 9.1% from the 1999 all-time top. According to one survey, 77% of all Americans are now living paycheck to paycheck at least part of the time. The official estimate is that 15% of Americans live in poverty. But the highest wage in the bottom half of US earners is about $34,000. The number of Americans who earn between one-half and two times the poverty threshold is 146 million.
Despite US households gaining $21 trillion in household wealth since 2009 (from rising property prices), the average family is still poorer than it was in 2007. According to research from economists William Emmons and Bryan Noeth of the Center for Household Financial Stability, the average household?s inflation-adjusted net worth is $626,800, 2% below its 2007 peak of $645,100. Indeed, almost half of all Americans had no net assets at all in 2009 as their debts exceeded their assets.
These inequalities have worsened in the ?recovery?. The OECD reckons that ?inequality has increased by more over the past three years to the end of 2010 than in the previous twelve,? with the US experiencing one of the widest gaps among OECD countries. According to the Economic Policy Institute, the wealthiest 1% of all Americans households on average have 288 times the amount of wealth that the average middle class American family does and more than the bottom 90% combined. Just 20 rich Americans made as much from their 2012 investments as the entire food assistance budget, which is designed to pay for families of four earning no more than $30,000 a year. The six heirs of Wal-Mart founder Sam Walton have a net worth that is roughly equal to the bottom 30% of all Americans combined. These facts put a different perspective on the ?exciting recovery? that the capitalist media and mainstream economists claim is on its way for the US in 2014.
And when we come to the rest of the capitalist world, prospects are even less ?exciting?. Each year the IMF has had to cut its forecasts for global real GDP growth.
Recently, it made its sixth consecutive downward revision with a global growth forecast for 2013 to 2.9% and for 2014 to 3.6%.
And as I have shown in many previous posts, growth in the largest so-called emerging economies have slowed sharply this year (in contrast to my slightly more optimistic forecast this time last year). It really is a crawl.
Historically, excluding the years of the world wars, only 20% of all recessions lead to output still being lower than before the recession after two years. Just 13% persist for more than three years and only 6% for more than five. This time, the US, Germany and Canada regained the previous peak level of GDP after some three years. But in 9 out of the 20 top capitalist economies, output remains below its peak six years afterwards. We can look at the real income per capita of each economy relative to the OECD average back in 2008 and then in 2011.
Per capita income in the US fell to 38% above the average from 41% above in 2008. Unsurprisingly, Greece saw the largest decline in relative income, falling to 26% below the average in 2011 from 14% in 2008. Among the G7 economies, Germany was the only winner, with per capita income rising to 14% above the average from 8% above in 2008. The figures also show that the UK was one of the biggest losers in the years after the crisis. From having a real per capita income of 7% above the OECD average in 2008, it slipped to 3% below the average in 2011.
But now there is much talk that the UK economy is about to stride forward in 2014. So much is the euphoria that the Conservative?s government?s finance minister George Osborne has receive the accolade of ?man of the year? by the Murdoch-owned Times newspaper. Year-on-year real GDP growth hit 1.9% in Q3 2013, but as with the US growth rate, the devil is in the detail. UK exports continue perform terribly, down 3%, with the UK?s external payments deficit with the rest of world hitting 5% of GDP. And the government?s own forecasters are less convinced of faster growth in 2014. A Treasury report put it: ?we judge the positive growth surprise to have been cyclical, reducing the amount of spare capacity in the economy, rather than indicating stronger underlying growth potential. We do not expect the quarterly growth rates seen during 2013 to be sustained in 2014.?
Again, much is made of the falling unemployment rate in the UK. But a very small number of large firms account for half the UK?s business turnover and employ three-fifths of its private sector employees. Almost all the growth in the number of businesses over the past decade or so has come from companies that don?t employ anyone apart from the owner. Jobs are being ?created? by people having to work for themselves in so-called start-ups that soon fail.
The key to sustained growth in a capitalist economy is an expansion in business investment. But UK business investment has fallen short of expectations year after year since the trough of the recession. Indeed, business investment has been flat during the recovery period.
And, as in the US, average real incomes in the UK have fallen significantly during the ?recovery? period. The independent Office for Budget Responsibility (OBR) doesn?t think average earnings will get back to pre-recession level until some time in 2017. When you take housing costs into account, it?s never. For those on or below the median wage, the situation is even worse. Their pay is forecast to continue falling in real terms for the rest of this decade. Among households below the official poverty line, the working poor now outnumber the unemployed, retired and sick put together.
Even the mainstream forecasters are worried about Europe?s recovery. Apart from Germany and its small satellites like Austria or the Netherlands, the rest of the Eurozone is either stagnant or still contracting. And even the stronger Scandinavian economies are beginning to weaken. And a new financial crisis remains a serious possibility in the Eurozone next year.
In previous posts in 2013, I have expressed strong scepticism about the likely success of Japan?s Abenomics, named after PM Abe?s supposed three ?arrows? of economic policy: a mixture of Keynesian monetary stimulus (central bank purchases of government bonds); government spending; and neoliberal reforms (deregulation, privatisation and weakening of labour rights). In 2013, the Keynesian objective of inflating prices to boost corporate profits has had some success (mainly by engineering an 18% fall in the value of the yen against the dollar and euro), but labour income and household consumption has not really responded and a huge increase in the sales tax is planned for April 2014. Japan?s economic growth is likely to suffer. At best, the government is expecting 1.4% real GDP growth in 2014, hardly a boom.
Everywhere in the major economies, the hope is that central bank policy of so-called ?forward guidance? will convince corporations that interest rates will stay low and so they can be confident of investing more. But central bank interest rate cuts, asset purchases (quantitative easing) and ?guidance? has just boosted stock markets up to now (http://thenextrecession.wordpress.com/2013/08/13/a-blind-guide-dog/). It has had little effect in getting banks in most countries to start lending to corporations or for those corporations to borrow to invest. Banks have still a lot of toxic assets from the credit boom on their books and prefer to improve their balance sheets rather than lend and large corporations, flush with cash, don?t need to borrow to invest. They just won?t invest.
And now the Federal Reserve has decided to ?taper? its injections of credit. Much of these injections ended up in the stock markets of the west and even more into emerging economies. Now this credit will begin to disappear gradually. This could create new pressures on some emerging economies that have prospered on capital inflows from the G7 banks and corporations.
In all the major economies, one thing has been missing from the recovery. That?s enough rising business investment to increase capacity and provide enough jobs to get unemployment down to pre-crisis levels. Without that, incomes, employment and household spending will not grow fast enough to get global growth back to the trend rate before 2007. Goldman Sachs is optimistic about an investment boom in 2014. ?The growth rate of nonresidential fixed investment (also known as capital spending) has slowed from a cycle peak of around 10% in late 2011/early 2012 to just 3% in 2013, and we expect a reacceleration to about 8% over the next year.?
I am not so optimistic. Investment depends on the level and growth in business profits and profits ultimately depend on the profitability of the existing stock of capital. In most advanced capitalist economies, the rate of profit for businesses is still below the last peak level of 2006, even in the US where profitability has recovered (see my post). That suggests to me that investment growth will continue to be below previous trend rates in nearly all the major capitalist economies.
Goldman Sachs is aware that profits matter,but they remain optimistic that there will be no decline in US profitability: ?the most important driver of profit margins is the gap between price inflation and unit labor cost inflation. When prices grow faster than unit labor costs, firms typically manage to raise their profit margins, and vice versa. In our view, the price/ULC gap is likely to move back into slightly positive territory in 2014.? They base this forecast on wages staying low and productivity picking up ? in Marxist terms, a continued rise in the rate of exploitation. But the data show that this solution to increased profitability has waned. Wage may still fail to rise much, but if investment does not return, productivity growth will not expand enough to boost the rate of exploitation any more.
The change in profitability of capital in the US does not suggest a new recession in 2014. But its flattening out this year (2013) and probable decline next year does suggest the US recovery may have reached its limits. My long-term thesis has been that the US profitability cycle has been in a down phase since 1997 and such a phase usually lasts about 16-18 years. If that turns out to be right, another leg down in profitability has still to come and along with it another recession. In the meantime, the global crawl will continue.
Courtesy of: The Next Recession