Time is running out
By Michael Roberts
Behind all the optimistic talk about the health of world capitalism from Bush, Blair etc, the more serious analysts are worried. In its semi-annual report, the Organization for Economic Cooperation and Development (OECD), representing the richest 26 countries in the world, announced that it is cutting its forecasts for all leading economies. The OECD also forecast that the US current account deficit would continue to rise, hitting nearly $900 billion or 6.7% of US GDP in 2006.
The OECD chief economist told the Financial Times, “We’re not saying there will be a doomsday tomorrow morning... but because adjustments to global imbalances are relatively slow, we are running the risk that an accident will happen. That’s where we are. Time is running out – the numbers are getting big, big, big.”
The OECD announced that growth of real GDP in its area would be 2.6% this year down from 3.4% last year. It is also expected world trade growth would slow to 7.4% from 9.4% in 2004. Of course, that’s still pretty good for capitalism, but these forecasts are heavily down on the OECD’s previous predictions last October. They see the US still growing at a healthy pace of 3.6% this year, but Japan will only manage 1.5% and the Euro area just over 1%. And the outcome may be worse than this.
In the Eurozone, all is doom and gloom. Economic growth in the Eurozone has dropped to just 0.5% in the first quarter of 2005. In Germany, there is no growth at all, while unemployment continues at well over 10%.
Schroeder in Germany is making a last desperate bid to hold onto power. He’s been under pressure from the left of his party for implementing cuts in benefits and under a cloud from the electorate for failing to cut unemployment, while making it more difficult for people to get any social security. The working-class stronghold of North Rhine Westphalia voted in a regional election to oust the Social Democrats for the first time in 40 years. Schroeder’s answer has not been to change his pro-business agenda, but to threaten early elections, which would surely mean the return of the big business parties of the Christian Democrats and right-wing Christian Social Union, with their thinly veiled racist anti-immigrant, anti-Turkish policies.
Things are little better for Chirac and his right-wing supporters in France. The referendum on the EU constitution has been defeated as the French people voted against a pro-business, anti-labour agenda enshrined in the ludicrously bureaucratic EU proposals. That has been the end of Raffarin as premier and the resurgence of the left in the French socialist party. Unemployment in France is also locked in at around 10%.
Europe’s capitalist movers and shakers have no explanation of why there is no growth. The governor of the Bank of Finland and a member of the European Central Bank, Erkki Liikanen, is baffled. “I don’t have an answer. Will the Eurozone pick up this year? It remains to be seen. We will see.” Very helpful!
The usual argument of the capitalist economists is that the reason that Europe does not grow is because it has too large a public sector and too much money is spent on benefits for the sick and unemployed and on pensions. What needs to be done is to adopt the so-called ‘Anglo-Saxon’ model. That means cutting taxes for big business and the rich as an ‘incentive to invest’. It means cutting benefits and pensions for workers and the poor as an ‘incentive to work’.
You see how incentives work under capitalism: it’s the carrot for those who already have carrots and it’s the stick for those who already have been beaten! You see the rich appreciate more and the poor appreciate less.
Capitalist experts claim that it may be unjust but a more unequal and more unfair society in the Anglo-Saxon model works because you get faster economic growth and that helps everybody. So the US and the UK can grow at 3% a year and have unemployment below 6%, while Japan and Europe grow at less than 2% a year and have 10% unemployment (at least in Europe).
Well, this view of capitalism may be about to have a nasty shock. The UK economy is in trouble. It grew just 0.5% in the first quarter of this year. Industrial production is now falling absolutely, at nearly a 1% rate. And we know that sales in the shops have stopped rising altogether. British households are no longer spending much (spending growth has fallen from 5% last year to just 2% now). That’s not surprising when people know that the value of their main asset, their house, has slumped back in the last year. At the same time, the Bank of England has driven up interest rates from 3.50% to 4.75% in the last 18 months. It’s just becoming too expensive to borrow.
Gordon Brown must be getting worried. He continually predicts that the UK economy will go on growing at over 3% a year. He shall be lucky to get 2% this year. This below-trend economic growth means that unemployment will start to rise. Indeed, the number of those claiming benefit has now risen for three successive months (despite all the efforts of government to put obstacles in the way of anybody claiming).
Rising interest rates, falling house prices, slowing household spending, widening trade deficit with the rest of the world and a pick-up in unemployment: that is the UK economy. It is also a paradigm for the rest of Anglo-Saxon world, especially the US.
The Financial Times recently talked about the less than attractive outlook for the Eurozone. It added, “In contrast, the outlook for the US economy, in the light of the recent retail sales and non-farm payroll numbers, seems more robust. But that only leads us to another puzzle. If the outlook for the US economy, and thus for corporate profits, is so good, why are US Treasury bond yields only 4.1 percent, a figure that looks low in real and nominal terms? No wonder investors are confused.”
A very low bond yield means that investors are not confident that economic growth will be sustained. Instead they think the economy is going to slow and they expect lower returns on their investments.
Indeed, everywhere (including the US) the surveys of consumer and business confidence are indicating a downturn. The Chief Executive magazine’s CEO confidence index in the US fell 16.8 points to 146.8 in May – its worst reading in over a year and its biggest monthly drop since the survey began in October 2002. On top of that, consumer confidence continues to decline.
So far, with US homes sales surging to a record high, while prices increased 15.1% year-over-year, the biggest price increase in 25 years, or since 1980, no wonder Americans continue to spend. But time is running out.
The US central bank, the Federal Reserve, has been steadily hiking interest rates. And there are signs that corporate profits have peaked and are beginning to drop back. Most significant, the economic boom of the last three years has not benefited the mass of American working people. In the Eurozone, real wages (that’s wages after inflation) are falling. But they are also falling in the US, despite rising employment and strong growth. The benefits of growth have all gone to big business in profits and tax cuts.
Indeed, American workers are hanging on to make a living. The Chief Economist of Merrill Lynch, the big investment bank, David Rosenberg, predicts a decline in the US economy because: “how many of you know that almost 60% of the job growth in the past year has been in the age cohort of 55 and up? Why are people today hanging on to their jobs longer than the norm? Because they need the income.”
But people of my age in the late 50s cannot work for another 25 years. Eventually, they will need pensions and benefits. And that is precisely the area that big business and the right-wing government in the US wants to cut. The Bush administration is laying out plans to decimate the public social security and pension scheme. And the big corporations are trying to end their pension schemes and cut back on health benefits for their workers – the one remaining gain that many organised workforces in US companies have achieved. Proper medical insurance in the US now costs over $1000 a month, or nearly £7000 a year!
The OECD announced that it expected the deficit on trade that the US runs with the rest of the world to reach $900bn next year, or over $2.5bn a day. The rest of the world will soon be unwilling to fund that amount to keep the US economy going, if it is at the expense of the rest of the world having no growth and rising unemployment. Only China continues to want the status quo, as it mops up the world’s trade.
It may not happen this year, but this huge imbalance is going to crack. It can only be righted by the dollar falling sharply (but that would mean Europe and Japan going into economic recession) or by the US economy slowing towards zero growth (and that too would be bad news for the UK, Japan and Asia, in particular). It will probably be a combination of the two outcomes.