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The global economy’s downward spiral
IN LESS than two months from mid-September, the
financial crisis developed into a full-blown, global economic crisis.
The US, EU and Japan are simultaneously in recession, for the first time
since the second world war. The IMF predicts an economic contraction of
0.3% for the advanced capitalist countries in 2009. What seemed relevant
only some months ago for the financial crisis – stock markets, interest
rates and money supply – have been sidelined by hard facts regarding
jobs, emerging markets (poorer countries) and the rising need for
Keynesian-style state interventions.
The depth of the crisis is underlined by the extreme
measures taken by governments. Preachers of privatisation have suddenly
become evangels of massive state intervention, including state ownership
of banks and companies. Theories and ideologies are put to one side. If
nothing is done, the recession will lead to "xenophobia, nationalism and
revolution", writes Martin Wolf, the Financial Times commentator.
This ‘autumn of summits’, however, has produced
neither a real explanation for the crisis nor a global programme to
solve it. The politicians cannot attack the real reasons for the sharp
downturn: the built-in crisis of the profit-run capitalist system they
are striving to save.
The Group of 20 summit in Washington in mid-November
was unique because it admitted the need for a global solution, including
governments outside the top G7. But, apart from general resolutions
defending global trade and the need for ‘strengthened’ supervision of
the finance sector, the only concrete agreement was to have another
summit in London in April. Waiting for Barack Obama to enter the White
House was also a factor.
The crisis started in the most global of
‘industries’, the finance sector, and is far from over. The Bank of
England estimates global bank losses so far at $2,800 billion. By early
November, 150,000 finance jobs had been cut globally. On 17 November,
Citibank declared it would axe another 52,000 jobs.
Thousands of billions of dollars in different rescue
packages have stopped the immediate threat of a collapse of the global
financial system, but have not overcome the credit crunch. Cuts in
central banks’ interest rates have not cut the costs of borrowing, since
banks have tightened lending even further.
At the same time, the financial crisis shed its
skin, growing into an economic crisis for world capitalism. The extreme
inequality of wealth and resource distribution means that poor people
will lose more from the downturn. Jobs and living standards are
threatened for hundreds of millions, as are the economies of entire
states. The World Bank has produced a shortlist of 28 countries, 13 of
them in Africa, which are especially vulnerable to the triple threat of
food and fuel price hikes, and financial turmoil. According to Oxfam,
200 million people have dropped below the poverty line this year.
All emerging markets have been hit, dependent as
they are on exports and capital inflows for investments. A number of
currencies have been de facto devalued, increasing prices and cutting
demand. The flow of capital to the top 30 emerging markets will drop
from $900 billon in 2007 to $560 billion next year, according to the
World Bank.
The prognosis for the US economy is being rapidly
revised down. Goldman Sachs predicts minus 3.5% for the US economy in
the fourth quarter of 2008 and another minus 2% in the first quarter of
2009. Another US bank, JP Morgan Chase, predicts that the world economy
will shrink by 1% in the last quarter of 2008 and the first of 2009. For
the whole of 2009, it predicts a global growth of only 0.4%. If borne
out, this mean a social and economic disaster. Population growth alone
demands global growth of 3% to keep per capita GDP constant.
The slump in the US has a direct effect on exporting
countries. In South Korea, the government has launched austerity
measures and is appealing to people to buy Korean. In China, growth is
falling sharply. Half of all toy and shoe factories have gone bankrupt,
axing hundreds of thousands of jobs. This is being aggravated by the
construction and property collapse. With a fall in commodity prices,
oil-producing countries like Russia are among those most affected.
The 15-country eurozone is in recession – defined as
a shrinking economy for two consecutive quarters. The EU commission
presented two scenarios: 0.1% growth or minus 1%. The OECD predicts a
negative growth of 0.5% in the eurozone next year. In Germany, GDP fell
by 0.5% in the third quarter. The economies of Spain and Ireland are
shrinking. Italy and France most likely also have negative growth.
Outside the eurozone, the commission believes the British economy will
contract by 1% – particularly vulnerable because of high consumer debt
and dependence on the finance sector.
The worst crisis in Europe, however, is developing
in Eastern and Central Europe. In mid-November, Ukraine got a $16.5
billion loan from the IMF, on condition it cuts public-sector
expenditure. This loan is only a quarter of what is needed to pay off
short-term debt. In Hungary cuts, increased interest rates, and a loan
from the European Central Bank have not stemmed a continued drop in the
currency, the forint. Hungary’s banks are foreign-owned and many loans
are in euros, making a devaluation of the forint more severe for
companies and households. The IMF, EU and World Bank have now given
another loan, $25.1 billion, demanding a reduction in the state deficit,
which is 9% of GDP. The Hungarian government has promised cuts in wages
and pensions.
The crisis in the Baltic states is also becoming
more acute by the day. Next year, Latvia’s debt to foreign lenders will
be four times its estimated income from abroad. For Estonia and
Lithuania, the figure is 3.5 and 2.5 times respectively. Today’s extreme
austerity policies will become worse.
In the US, consumption (accounting for 70% of GDP)
fell by 3.1% in the third quarter of 2008. Retail sales fell 2.8% in
October, the fastest drop since the index started in 1992. General
Motors declared October the worst month for over 60 years (minus 45%).
Unemployment rose from 4.8% to 6.2% in the year to September.
World trade is slowing. The IMF has cut its world
trade prognosis from 4% growth for next year to only 2%. The Baltic Dry
Index, a leading cargo shipping, has dropped 86% in value since its peak
in May. Global trade could even contract next year, for the first time
since 1982, according to World Bank boss, Robert Zoellick. Chinese
Baosteel, the world’s biggest producer, will cut production by 10% in
the fourth quarter.
A global investment crisis is developing out of the
drop in demand and the reduced flow of credit. Investments in the US
fell by 1% in the third quarter and, in the housing sector, by 19%.
After the latest interest rate cuts, central banks have very little room
left. The US Federal Reserve rate is at 1%, while the Bank of Japan is
down to 0.3%. The collapse on stock exchanges, 45-50% according to
global indexes, will now affect the huge hedge funds. Morningstar’s
hedge fund index fell 7.9% in September, 9.4% in October. Many
speculators now want to sell or pull out.
The political effects of the crisis are only just
beginning. Many politicians have raised their nationalistic tone but, so
far, have been forced to attempt common measures with other governments.
We will see further unconventional efforts to save the capitalist system
– as in the 1930s. To save the banks, packages have been presented by
the US ($700bn), Germany ($645bn), Britain ($590bn), France, Russia,
etc. In the top ten are also Sweden and Austria, with big bank ownership
in Eastern Europe, alongside Germany.
In fiscal support – now strongly advocated by the
big banks and by the IMF – the US, Japan and most European states have
launched other packages. For the car industry, the US has promised $25
billion in credits and the EU €40 billion. However, there must be some
limit to such measures, which will result in huge state deficits. The US
fiscal deficit may rise to over $1,000 billon next year.
Among workers and youth, there is a certain shock
reaction to the crisis, but also rising anger against the thousands of
billions going to the bankers, while welfare is under attack and nothing
is done to save jobs. This will prepare the way for the only real
alternative, and way out of the crisis: democratic socialism on a world
scale.
Per Åke Westerlund
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