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A low growth world

posted 13 Mar 2012, 05:20 by Admin uk

 by Michael Roberts

 Back in January I reviewed the latest evidence on the state of the world’s major economies (see my post, World economy: where are we now?, 18 January 2012).  I concluded then that “Capitalism is weak, but the patient is not having a relapse and going back into intensive care.”  That conclusion was based on reviewing the economic forecast from the World Bank and analysing a couple of key high-frequency indicators of economic activity in the US.  The World Bank had forecast just 2.5% real GDP growth for the world economy this year and even lower at 1.3% for the mature capitalist economies of the OECD.  Capitalism appears to be recovering from the slump of 2008-9 but very sluggishly and with even a small setback in 2011 compared with 2010.

Indeed, in a new paper, Barry Eichengreen and Kevin O’Rourke (A tale of two depressions, conclude “that, while industrial production and trade recovered much more quickly than during the Great Depression, both series now appear to be slowing down”. Since the World Bank report, both the IMF and the EU Commission have issued economic forecasts that conclude something similar – namely that capitalism is still recovering but at a snail-like pace.  This gives the Great Recession the character more of a Long Depression, similar to that experienced by capitalism in Europe and America in the 1880s and early 1890s.  Recovery from a significant slump in 1873 was quick but then further slumps ensued and economic growth remained fragile right through the 1880s.

Having said that, again I must emphasise that capitalism is not yet slipping back into economic recession or slump.  I have found that the best high-frequency guide to where US capitalism is going is to look at the monthly Institute of Supply Management (ISM) survey of US businesses, both in the manufacturing and services sectors, for the evidence of orders, employment and costs.  I have combined the ISM indexes in the two sectors to produce a good indicator of the state of the US economy.  Last January, that combined index showed that the US was in ‘low growth’ territory (defined as below trend average of about 3% a year) at the end of 2011, but not in recession.  The latest ISM figures were released this week and they confirm that position.  Indeed, the latest chart suggests that there has been a slight pick-up in US economic activity in its capitalist sectors.

Another high-frequency measure of US economic activity is the ECRI’s leading indicator, which compiles various measures of the economy into one index.   This also shows that the US economy is in a low-growth mode (still well below pre-crisis levels of activity), but not heading back into recession.

What about the rest of the capitalist world?  Well, a quick look at the last two months of purchasing managers data for Europe, Japan and China suggest much the same.  If a PM index is greater than 50, that is supposed to show that an economy is still growing, with anything below 50 suggesting contraction.   JP Morgan have a world index that scored above that 50 in both January and February with the direction up (First bar in red).  Japan is scoring just on 50 (last bar in red).  Only Europe appears to be contracting (slightly) – last bar in blue.  As for China, it depends on which PM measure you want to follow, that of the HSBC survey (first blue) or the official government survey (third red).  HSBC shows China to be contracting (but only just), while the official index shows it still to expanding,if at a slower pace than this time last year,

In sum, the capitalist world economy struggles on at a rate of growth that is not enough to restore the jobs lost in the Great Recession and not enough to encourage big business to kick in with sizeable new investment, or for consumers to want to spend more.  I have argued in this blog before that the reason for this low-growth world is primarily that the recovery in profitability in the major capitalist economies has not been enough; and that these economies are still weighed down by debt (or ‘dead capital’).   This makes it impossible to have a ‘normal’ cyclical recovery for recession as in 1999-2 or 2001.