World recession gains momentum
The downturn is spreading around the global economy. The sharp US slowdown is already having severe effects on Europe, Japan and East Asia. LYNN WALSH charts the slide towards recession.
AROUND THE WORLD, capitalist leaders are praying that the US downturn will be mild and brief. Their hopes for avoiding a world slump are pinned on the expectation of a rapid revival of the US economy that will once again provide the stimulus for global recovery. Otherwise, the prospects for capitalism are bleak. Europe is experiencing a sharp slowdown. Japan, after a decade of stagnation, is sliding into recession. East Asia, after a short growth-spurt following the 1997-98 slump, is heading towards a new crisis. The catastrophic slumps in Turkey and Argentina are a warning of what will happen in any number of vulnerable, semi-developed economies in the coming months. A vicious spiral appears to be developing, with a whole ensemble of adverse factors pushing the international economy towards a generalised crisis.
Such is the prestige of US capitalism following the fabulously profitable bubble-boom of the late 1990s that there appears to be boundless confidence among capitalists everywhere that the US will supply the antidote to the unfolding recession. Apart from the unbounded optimism of America’s big-business leaders and commentators, however, there is nothing to suggest an early recovery. On the contrary, both cyclical and structural factors point to a prolongation and deepening of the downturn.
Preliminary GDP data that the US economy grew at an annual rate of 2% during the first quarter of 2001 produced a brief rally on the stock exchange, also stimulated by the Federal Reserve’s cuts in interest rates (from 6.5% to 4% over recent months). Later, however, this was revised down to only 1.3%. This followed 1% annualised growth in the fourth quarter of last year, compared to the 4% per annum growth rate over the previous two boom years. Almost a million jobs have been lost since last October, and manufacturing industry has been particularly hit. Productivity growth has slowed dramatically (despite the supposedly lasting gains of the ‘new economy’), dropping by 1.2% in the first quarter, the biggest drop since 1993. Lower productivity, together with higher wage costs and fuel bills, has squeezed big-business profits (already under pressure from overcapacity and intense competition which has squeezed prices). First-quarter profits for the US’s 1,433 biggest corporations were down 42% (following a 20% drop in the fourth quarter of 2000), the worst profit figures for a decade. Inevitably, the corporations have sharply reduced their capital spending.
Consumer spending, the main source of demand during the boom, increased by 2.9% in the first quarter. This partly reflects wage increases gained by workers at the peak of the boom, and without this spending there would already be a marked recession. Household spending, however, continues to run about 1% greater than after-tax income, indicating the huge dependency on consumer debt. Bush and Greenspan claim that interest rate cuts combined with tax cuts will bounce the economy back onto a growth path. These measures, however, will have only a limited, short-term effect. A section of taxpayers will share a total of $38 billion rebates this year. But this will be a one-off boost (in subsequent years Bush’s measures will mean lower tax payments mainly for the wealthy). The rate cuts may also help slow the pace of the downturn (as well as postponing the decline of still grossly over-valued shares). Demand, however, is not the problem, as the continued growth of consumer spending shows: the downturn arises from the sharpening crisis of over-capacity and profitability, which will not be reversed by these measures.
It is never possible to predict the exact trajectory of a downturn, the severity or the time-scale. But on the basis of current trends, as opposed to the foolish optimism of the speculators, a ‘second-half’ recovery in 2001 is very unlikely - except, perhaps, as a brief prelude to an even sharper downturn. Much more likely is a lengthy period of stagnation or even a period of negative growth. Even stagnation of the world’s dominant economy will have profound effects internationally.
Can Europe escape?
EARLIER THIS YEAR European capitalist leaders were putting forward the fanciful notion that Europe would avoid the effects of the US downturn, some even claiming that Europe would emerge as the locomotive of world growth. In March, the president of the European Central Bank (ECB), the quixotic Wim Duisenberg, said: "At this juncture, there are no signs that the slowdown in the US economy is having significant and lasting spillover effects on the euro area". Even at the beginning of May, he was still asserting that, although the US slowdown was having an impact, it was only a "limited impact". Others were taking a more realistic view. "We are already observing the sharp slowdown in Europe", commented a Merrill Lynch economist: "You do not have to wait any more to see it. It is here right now". (International Herald Tribune, 24 May)
The fantasy of European immunity has been dispelled by the sharp first-quarter slowdown in the German economy, which accounts for 35% of the eurozone’s economic activity. Combined with the beginnings of a slowdown in France, this indicates a generalised slowdown in the European economy. Throughout Europe, the manufacturing sector, which is still the decisive core of the capitalist economy, has been hit by the slump in US demand and the continued stagnation in Japan. Germany’s manufacturing output fell by 3.7% in March, and is continuing to decline (along with the construction industry, which has been in the doldrums for several years). Claims that Germany would not be seriously affected by the US have been proven completely false. Although direct exports to the US amount to only 3% of Germany’s GDP, there is a whole range of intermediate goods – chemicals, bearings, etc – which are exported to other European countries for the manufacture of products ultimately destined for the US market.
Replying in April to Duisenberg’s unreal optimism, Horst Koehler, managing director of the International Monetary Fund, pointed to multiple "linkages between the slowdown in the US and the slowdown in Asia, and, of course, the slowdown in Europe. These are linkages not only via trade. The linkages are via financial and corporate connections, stock prices, and business confidence". (International Herald Tribune, 24 May) Finance-sector economists are now predicting only a 1.5% growth in Germany this year compared with 3% last year, but this, too, may be optimistic. The German slowdown is already affecting Austria, Czech Republic and Poland, which send about a third of their exports to Germany.
The French economy is also slowing, as are Denmark and Netherlands. Forecasters are now predicting 2% growth for the eurozone twelve, compared with 3.4% last year. Far from becoming the locomotive of world growth, Europe is reverting to the slow track, after a brief growth-spurt (of a relatively feeble 2.8% to 3.5% per annum) in the last couple of years. Between 1992 and 1999, the European Union averaged 1.9% per annum growth, compared to 3.6% per annum in the US.
The slowdown has also highlighted the lack of policy coordination between the twelve states of the eurozone and the disarray of the ECB. In March, when clear signs of a slowdown began to appear, the US leaders appealed to the ECB to follow the example of the Federal Reserve and cut interest rates. Duisenberg responded by arguing that Europe would ride out the US downturn and that the danger of inflation was greater than the danger of a slowdown. On 10 May, however, the ECB cut its rate by 0.25% to 4.5%. Duisenberg claimed that this was simply a technical adjustment to compensate for previous errors in the ECB’s estimates of the Eurozone money supply, but the cut was widely seen as a panicky response to accelerating slowdown, especially in Germany. Under current conditions, the interest rate cut is unlikely to have any significant effect in reviving growth.
Clearly, the cut did nothing to bolster confidence in the euro on world financial markets. The euro fell to around $0.86 compared to the all-time low of $0.83 in November 2000 (approximately 30% below the 1.17 euro/$ when it was launched in January 1999). Last year, the ECB (assisted by the Federal Reserve) stepped in to support the euro; this time the ECB denies any intention of trying to support the euro’s value.
The decline of the euro reflects a continued transfer of financial assets by companies, banks and speculators from the euro to the dollar. This partly reflects a continued flow of investment capital from Europe to the US, based on expectations that the US downturn will be short-lived and there are better prospects for profits in the US than Europe. The flight has been accentuated by the rise of inflation in the eurozone (which obviously has the effect of devaluing euro-denominated assets for overseas investors). Data appearing just after the rate cut showed eurozone inflation to have risen to 2.9% (compared with the ECB target of 2%). In Germany inflation rose to 3.5%, while unemployment – already over four million – rose, raising the old spectre of ‘stagflation’. Consumer-price inflation in particular reflected higher meat prices (due to the BSE and foot-and-mouth crises) and sharply increased fuel costs. The weak euro, which increases the domestic prices of imports, also contributed to higher inflation, and this will be accentuated if the euro continues to fall against the dollar, yen and pound.
Moreover, the euro has been undermined by currency movements made in anticipation of the scheduled replacement of national currencies by euro notes and coins in January 2002. At the beginning of this year, over $40 billion a month was flowing from the euro to the dollar. Much of this extraordinary transfer, it is believed, reflects a move by the criminal underworld, especially Russian and Balkan mafia and other black marketeers, to change their money into dollars before the euro change-over. "The reasoning of the gangsters is pretty simple", says one of the researchers who have investigated this transfer: "If you are running black markets, you don’t want to show up at bank with a large suitcase of marks and have to explain where they came from before you exchange them into euros". (Washington Post, 7 May)
Eternally optimistic, many finance-sector economists are issuing comforting assurances that there will be a rebound in the European economy later this year. Admitting a "bigger global shock than European policy-makers initially thought", Robert Lind of the ABN-Amro bank says: "But, as with the Asian crisis, it should be a temporary slowdown in Europe rather than a collapse". (Financial Times, 3 May) All the indications are, however, that Asia is once again sliding into crisis, mainly as a result of the US downturn. Referring to the German economy, The Economist (19 May) asserts that it is "better tuned than it was" (because of Schröder’s attacks on social spending and workers’ conditions): "Give it a steady supply of American fuel and it could spring to life again". Again, this reflects a widespread assumption among capitalist strategists that the US downturn will be short-lived. But this ‘given’ factor is nothing more than blind faith.
Japan’s collapse
THE CANDID ANNOUNCEMENT on 8 March by Japan’s finance minister, Miyazawa, that ‘the nation’s finances are abnormal, in a condition that is quite close to collapse’, sent a tremor around all the world’s financial markets and finance ministries. Later, he apologised for his ‘inappropriate words’, claiming that what he had intended to say was that ‘Japan will face a hard time reforming its fiscal situation’. Really, of course, he had blurted out the truth.
In the last days of premier Mori’s government, it was becoming clear that despite ten pump-priming packages totaling over $1,000 billion, the world’s second largest economy was sliding back into recession (having averaged only 1% per annum growth over the last ten years). Successive government spending programmes, mostly spent on white-elephant construction projects, have failed to stimulate growth – but have run up the national debt to 130% of GDP. Only extremely low interest rates have allowed the country to escape a major fiscal crisis. At the same time, successive Liberal Democratic Party (LDP) governments, all promising ‘reforms’ and ‘restructuring’, have failed to seriously tackle the private-sector debt mountain. Despite pumping in Y9,300 billion ($77.5bn), the banks are still burdened with between Y17,000 billion and Y35,000 billion ($142-292bn) of bad debts. As quickly as hard-core bad debts are cleared (mostly on the basis of government hand-outs) new bad debt appears as more companies become insolvent or collapse. The combined total of government and corporate debts (according to a recent estimate) amounts to five times Japan’s GDP.
Data for March and April showed ‘Japan’s slide towards recession picking up steam’, as one headline put it. In the past four months, industrial production has fallen at an annual rate of 2,000%. Unemployment rose to 4.7%: the official figure, which undoubtedly underestimates the real level, has been hovering around this amount for some time. Consumer prices fell again, as did consumer spending, which will accentuate the spiral of deflation gripping the economy. These trends make it likely that the economy will slip to zero or even negative growth later this year.
Some capitalist strategists and economists (like Paul Krugman of MIT) have for some time been urging that the Japanese government should deliberately stimulate inflation (of between 2% and 4%). Their argument is that Keynesian-type public spending projects have had no effect in stimulating growth (only in feather-bedding the big construction companies and other corporations). One reason is that Japan has a high level of personal saving, especially as an ageing population feels compelled to make personal provision for retirement and health care. A moderate level of inflation, it is argued, would push people into spending on goods, housing, etc, rather than allowing the value of their savings (deposited in banks at a zero nominal interest rate) to be eroded by inflation.
Inflation would also have the effect of reducing the real value of debt, relieving the corporations and the government of some of the burden of servicing their massive debts. Inflation, in fact, would tend to bring about a redistribution of wealth from the savers (in this case, the majority of working-class and middle-class households) to heavily indebted borrowers (corporations and the government). This, it is claimed, would (together with the liquidation of bankrupt companies) begin to stimulate the revival of growth. Such an approach would be a compete turn away from the monetarist policies associated with neo-liberalism over the last two decades, to a blatantly Keynesian policy of trying to stimulate demand. Nevertheless, the argument, previously advanced by a few academics like Krugman, appears to be gaining ground among policy-makers in Tokyo, Washington and elsewhere.
The Japanese authorities appeared to take a step towards implementing such a policy in March when the Bank of Japan effectively cut interest rates to zero (having prematurely raised them from zero to 0.15% last August on the mistaken assumption a revival was underway). At the same time, the bank announced that it was taking ‘quantitative measures’ to increase liquidity, that is, by increasing the central bank credits available to the banks for commercial lending.
Commentators who favour a pro-inflation policy, however, doubt whether the central bank’s measures will actually have much effect. Even if there is more liquidity, why should banks lend more money when there is already so much bad debt and the scope for profitable investment is limited? The Bank of Japan, say the new Keynesians, should print money to buy government bonds in order to pump liquidity into the economy. The bureaucrats who run the central bank, however, appear to be held back by fear that printing money in that way (while undoubtedly counteracting deflation) would open up the danger of run-away inflation. They also fear that without drastic restructuring to cut away bankrupt or unprofitable corporations, an inflationary binge would further postpone the day of reckoning for unviable businesses. Inflation would also reduce the value of the yen, which would stimulate exports but add to inflationary pressures (through dearer imports) and create problems for rival economies in East Asia.
Nevertheless, faced with the prospect of a slump, Japanese capitalist leaders may well be pushed towards an inflationary policy at a certain point. Inflation, however, will not provide an easy escape from prolonged stagnation. A pro-inflation policy is unlikely to be implemented in the measured, controlled way envisaged by economists like Krugman. More likely, the ruling class could lurch into a new policy under conditions of sharpening economic and political crisis, with the possibility of unpredictable and uncontrolled effects.
Junichiro Koizumi, the new LDP prime minister who replaced the discredited Mori, is promising a programme of ruthless change to tackle the fundamental problems gripping the Japanese economy. At the moment, he is enjoying a honeymoon of almost unprecedented popularity, mainly because of his slick personal presentation and the fact that he is not identified with the established leadership of the LDP, who are notorious for their bureaucratic arrogance and corrupt links with big-business interests.
If Koizumi proceeds with his policies, however, they will have devastating effects on the working class and wide sections of the middle class. Basically, his policy (like that of all other LDP leaders) is to rescue the big banks and the corporations that remain viable. The government, for instance, is planning to buy up corporate shares held by the banks as collateral for corporate loans. Many of the loans are now ‘bad’ (that is, unrepayable) while the shares, since the collapse of the bubble, are next to worthless. The rescue policy would use tax-payers’ money to get the banks off the hook. At the same time, Koizumi would continue to use government funds to write off bad debts, but, he claims, only if there is a restructuring of the corporations and unviable companies are allowed to collapse.
In effect, Koizumi is no more than threatening to implement plans that many previous governments have advocated but have repeatedly diluted or postponed. This is partly because LDP leaders are tied to business interests who favour ‘reform’ only if it does not cause them any financial pain. But it is also because they fear the explosive social and political consequences of the collapse of a whole swathe of corporations and finance houses, which would inevitably follow a decisive wiping out of bad bebts and worthless share-holdings. Millions of workers and middle-class salary earners would be thrown out of work. In effect, the decisive, rapid wiping out of the excesses of the 1980s bubble would have the same effect as a slump – the brutal capitalist ‘cure’ that has been continually postponed by the financial life-support schemes provided by a succession of LDP governments over the last decade.
Not surprisingly, many capitalist commentators, both in Japan and in the West, are skeptical about Koizumi’s prospects of actually carrying through a radical restructuring. Despite the change of government, a recent editorial comment by the Financial Times (9 March) remains valid: "Japan’s economic problems are so deeply embedded that only a fundamental change in the way the system is run will help. But it is difficult to see what will change in Japan without a financial shock".
Recovery in East Asia
EVEN THE IMF/World Bank strategists were surprised at the recovery in East Asia following the 1997-98 crisis. Growth resumed quite strongly in many of the former ‘tigers’, and financial markets appeared to stabilise. This recovery was overwhelmingly dependent on the accelerated growth of the US economy, stimulated by the further inflation of the stock exchange bubble. The US market provided a massive market for goods produced in Asia, which were further cheapened by the devaluations following the 1997 crisis. The mushrooming of the US technology sector, moreover, increased demand for IT products. In 2000, the region sent about 25% of its exports (in dollar terms) to the US, and a high proportion of inter-Asian trade is ultimately tied to trade with the US.
Resumed growth (with the revival, of course, of profitability) has softened criticisms from Western capitalist leaders directed against ‘crony capitalism’, and muted demands for ‘reforms’ - that is, for the restructuring of finance, industry and services on Anglo-Saxon, neo-liberal lines in order to open up the region to the US and European multinational corporations. Nevertheless, Jamal Kassum, the World Bank regional vice-president, recently warned that big-business confidence was being ‘diminished by the slow pace and questionable quality’ of financial and corporate restructuring, and the slowness of deregulation of trade and finance.
The brief Asian recovery, however, has not meant a return to the pre-1997 position. Millions of workers throughout the region remain unemployed, or under-employed on poverty wages. The option of returning to the countryside has been ruled out for large sections of migrant workers because of the development of capitalist farming. Contrary to previous claims that the market would lift the region’s people out of poverty, around half the population of East Asia live on less than $2 a day.
Moreover, as the result of brutal, breakneck industrialisation, followed by a deep economic crisis, a number of countries were convulsed by revolutionary movements (Indonesia), sweeping protest movements (Philippines) and massive strike waves (South Korea). "In one respect", comments The Economist (19 May), "matters look much bleaker than they did in 1997. Then the region – most of it, anyway – was seen as politically stable. Now, from Indonesia to the Philippines, it looks explosive. In other respects, there are some uncomfortable parallels…".
As in 1997, the first part of 2000 has seen a sharp slowdown of growth (with absolute falls in several countries), a decline in exports, and the intimations of a currency crisis. Stock markets are falling, while corporate defaults are soaring. The immediate cause of the unfolding crisis is different from 1997: the sharp fall in the US’s demand for Asia’s exports, combined with reduced demand from Japan.
"Across Asia", reported the Washington Post, "the US economic slump is taking a heavy toll, battering exports, dragging down growth and threatening to derail recovery… Asia’s export dynamos have stumbled badly in recent months… Many fear that the worst is yet to come". (International Herald Tribune, 31 May) In contrast to 1999 and 2000, when the region achieved an annual growth rate of around 7%, there has been a sharp slowdown in the region’s major economies since the end of last year (eg Hong Kong, South Korea and Taiwan), with negative growth in others (eg Malaysia and Thailand). Exports have been falling precipitately. In the year to April, exports slumped 11% in Taiwan, 10% in Thailand, 10% in Korea, and 2.4% in Hong Kong.
Technology exporters have been hit particularly hard (electronic components account for a third of Taiwan’s exports, for instance). While spending by US firms on technology products soared 25% last year, it is likely to be negative this year. The demand for servers, chips, and other electronic gadgets has slumped.
As with Europe, capitalist leaders dismiss the idea of a prolonged regional slump. "This is not the same East Asia that faced the crisis in 1997", claims Kassum of the World Bank. As with Europe, their optimism is predicated entirely on a short ‘V-shaped’ slowdown in the US followed by the resumption of rapid growth – and demand for Asia’s exports. At the same time, they underestimate the economic, social and political factors that may well interact to produce a deep regional crisis.
China tiger?
SO FAR, CHINA appears to have escaped the regional downturn. The World Bank predicts that China will have growth of 7.3% this year, compared with 8% last year. Credit Lyonnais, however, considers that official Chinese government figures overstate growth, which they estimate at 3% to 4% this year. (Credit calculates that the six south-eastern provinces together with the cities of Beijing and Tiajin account for 46% of China’s GDP and 75% of exports by value - International Herald Tribune, 8 May). China has had the advantage of receiving around four-fifths of the Foreign Direct Investment flowing into the region, as well as lower wage levels and cheaper production costs. Moreover, capitalists are now starting to move production into the interior where wages and other costs are even lower. Recently, Chinese exporters of technology and other products have been increasing their share of export markets at the expense of other Asian producers. In 2000, China’s share of US information technology imports rose to 11%, exceeding the shares of South Korea and Taiwan.
Nevertheless, the health of the Chinese economy decisively depends on exports to the US and Japan (which account for about 40% of China’s exports). While China has in recent months gained at the expense of regional rivals who have already been hit by the downturn, the Chinese economy will not escape the effects of the world slowdown. Internally, the Chinese regime is already facing growing economic and social tensions. Externally, the position of the Chinese economy is beginning to be threatened by the fall in the value of the yen and other East Asian currencies (which cheapens the export prices of its rivals). The Chinese government (according to some commentators) is beginning to complain about the weak yen in particular and to be privately raising the prospect of a devaluation of the Chinese currency, the renminbi (yuan). That could trigger a round of competitive devaluations – if not already triggered by another Asian state – leading to another serious currency crisis.
Most East Asian currencies (in contrast to the pre-1997 situation) are not pegged to the US dollar (apart from the Malaysian ringitt, which is officially pegged, and China’s renminbi, which is effectively pegged to the dollar). The slowdown of production and trade, together with falls on financial markets, has led to the downward floating of all of the un-pegged currencies. Most important has been the decline of the yen against the US dollar (from around Y105 to the dollar last year to around Y120 currently). This trend is being encouraged by the Japanese government, which some commentators believe would like to see it float down to Y140-150 to the dollar. This is strengthening the competitive position of Japanese exporters just at the time when their rivals are being squeezed by the slowdown in the US and in Japan itself. At the same time, the big Japanese corporations are now moving quickly to relocate production facilities in low-cost Asian countries, putting additional pressure on their rivals.
Asian leaders clearly fear that stagnant economies and sliding currencies may, as in 1997, give rise to volatile speculative flows from currency to currency, destabilising the regional economy. In May, the Japanese government made currency ‘swap agreements’ with South Korea, Malaysia and Thailand, involving hard currency reserves that would supply liquidity to countries facing speculative runs on their currencies. Talks are also taking place to set up swap agreements between all ten ASEAN members plus China, Japan and South Korea. To be effective, the swap agreements have to be backed by hard currency reserves: Japan’s agreement with Thailand runs to $3 billion, that with Malaysia $1 billion. "These are not sums", comments The Economist (12 May), "that will terrify the currency markets". In other words, swap arrangements will provide little protection against a new Asian currency crisis that could plunge the region into another slump. As in 1997-98, that would have a major adverse impact on the whole world economy.