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1994 – Cause and effect in the global recession

The 1990-94 recession began in North America and the United Kingdom. The rate of corporate profits peaked in the US and Britain in 1988. Profits continued to decline in the US, UK and Germany in 1989 and 1990. Company profits did not reach their high point in Japan until 1989 and fell for the next three years. The fall in the mass of profits there led to a fall in new investment during 1990. As a proportion of GDP domestic investment peaked in the USA in 1987 at 17%, was stagnant the following year and declined in 1990 and 1991. The 7% fall in business investment in the USA during 1991 was the biggest drop since 1975.

With the collapse of profitability and investment, the level of corporate debt was unbearably heavy and companies cut back on non-interest costs leading to sackings and closures. This naturally led to a similar crunch in consumer/household debt as unemployment (or the fear of it) rose, thus dampening spending plans. Retrenchment here spread the effect of the recession through all sectors of the economy. As a result total output registered its first fall in Canada and the United Kingdom in the second quarter of 1990. It spread to the United States in the third quarter and by the end of the year Sweden, Finland, Norway, Switzerland, New Zealand and Greece were all in recession.

The “boom”, however, continued in Germany throughout 1990 and 1991 and this pulled France, Italy, Benelux, Denmark, Spain and Portugal along with it. The recession in Germany only began in the middle of 1992, when output and investment declined sharply, thus enforcing a continental European recession in all those countries most closely tied to Germany. Japan also fell into recession by the end of 1992.

The trough of the business cycle in the USA, UK and Canada occurred in 1991. Thereafter, a weak recovery began in the Anglo-Saxon countries in the second quarter of 1992—first in the USA and then in Canada and the UK. This ensured that the international recession was not synchronised. The reasons for this were twofold. First, the 1989 financial and stock market crash had a differential effect on the Anglo-Saxon countries on the one side and on Japan on the other. Japan’s industrial cycle had not peaked by the time of the crash.

Only in late 1991 did housing and business investment retrench and this was followed by automobile production in 1992. The Japanese recession has been as deep as in 1973-75 but this time its effects were more generalised throughout the economy. Secondly, property based asset inflation was not such a major aspect of the 1980s recovery in continental Europe (outside Scandinavia). Rather, inside the European Union (EU) the recovery was based more on major business investment after 1985 in the run up to the Single Market.

Moreover, the effect of German unification in 1990 was to prolong the expansionary industrial cycle, both in Germany itself and in all those countries intimately tied to its prospects through the ERM.

Overall, however, the 1990-93 world recession appears to have been as deep as the 1980-82 recession. Whilst the decline in the USA—the biggest imperialist power—was less than last time, the fall in Germany and Japan was deeper.

This latest cycle has thus witnessed a continuation of the twenty year trend of depressed accumulation, declining productivity, stagnant real wages in the OECD, high real interest rates and rising unemployment. Unemployment was over 11% in the EU and Canada by the end of 1993, and was set to exceed 12% during 1994 in the EU. Germany has only begun its process of huge shakeouts which will continue well into the cyclical upturn.

Two years into this recovery, US factory employment is at its lowest since 1965. Some 600,000 jobs were lost in 1993 throughout the recovering economy. Employment figures for the largest 500 companies have continued to go down over the last nine years. Thus the trend line of structural unemployment in the major imperialist nations is plainly rising.

The cyclical recession in the countries of continental Europe bottomed out in late 1993 or early 1994 and recovery began. Japanese capitalism followed suit in mid-1994. The OECD predicts combined growth of 2-3% during 1994 for its 24 members. The general consensus of bourgeois economists is that investment and consumer spending will remain slow until mid-decade, hampered as it is by overhanging debt and a “low savings rate”, leading to a shortage of capital.

Looked at another way, low profits and stagnant wages produce a low rate of capital accumulation (i.e. net investment). In the longer term the World Bank forecasts an average growth rate for the G7 countries in the decade 1992-2002 of a paltry 2.7% per annum. This is only half the average of the long boom (1951-73) and even less than the average for the years 1973-1990.

The recovery so far in the US/UK is the weakest of the post-war period. For the past five business cycles the average annualised rate of growth during the first five quarters of the recovery phase was 4%. The relevant rate for the present recovery was 2% per annum.

Nevertheless, crises are curative for capitalism. Not least they address the problem of profitability and productivity. If, through sackings, real wage cuts, and factory closures, the rate of exploitation can be raised and profit margins increased then residential and business investment can begin to revive, laying the basis for recovery. US productivity improved in 1991 and 1992 at 2.5%per annum and 3% per annum respectively.

The 1992 figure was a twenty-year high, reflecting a very big productivity improvement throughout the service sector. The mass of profits in the US rebounded on this basis in 1992 by 20% from their 1991 trough.

Faced with 7% per annum growth in the last quarter of 1993 and more than 4% per annum growth in the first quarter of 1994 many protagonists of the ruling class in the USA are of the opinion that their economy has never been in a better structural position since the 1960s and that the country is winning the competitive battle against Japan and the EU.

Are we witnessing a normal cyclical, transitory phenomenon or are the professional optimists right?

US enterprises have returned to the top of the league table not only in the sphere of high technology but in “old” industries; machines/Caterpillar, steel/Nucor, cars/Ford/Chrysler. Since 1984 exports have doubled (100%) compared to Japan. The surplus in the service industry has increased five times since 1991 and the budget deficit has declined to 1.7% of GDP in 1993.

This positive trend can be explained by favourable exchange and interest rates, public funding (Sematech), improved quality and higher productivity (restructuring and re-equipping). In 1993 the 500 largest companies increased their profits but their sales figures did not increase.

Their competitive advantage was gained at the expense of the workers. In 1993 wages in the car and machine tool industries were cut by 0.2% and new jobs—often paid at only half the rate of the old ones—are accompanied by minimum social welfare provision. The strength of the USA amongst the industrial nations is its low wage costs which declined by 6.4 % each year between 1985 and 1993, (cf Germany 4.2% and Japan 6.6 %).

If one looks to the medium and long term, however, there remain problems which have not been solved. The savings and investment rates in the USA are lower than in other major industrial nations (only 12% of GNP is invested in plant and equipment) ensuring that the average age of machine tools is seven years, older than the average for its international rivals. Public spending for infrastructural improvements is three times lower than in Japan.

Funding of research and development is stagnant. The educational and training qualifications of the workforce are not very high. Even if the budget deficit or the imminence of a “Savings and Loan” collapse are no longer causing daily alarms the reduction of their debts has only just begun and is not going deep enough. The first big boost from the “information highways” project has fallen away after certain large industrial merger projects fell through or had to be delayed. Computer manufacturers and software firms complain of ever increasing competition and dependence on products from abroad. The car industry still continues to experience a $44 billion deficit in bilateral trade with Japan.

So the USA cannot be relied upon to act as the locomotive of a generalised international recovery. But neither are the more “spontaneous” mechanisms of the business cycle working as before. Previous recoveries have relied upon inventories (stocks) being rebuilt early in the recovery, once profitability has been restored.

In this cycle “lean production” methods are dampening the effect of this, contributing to the weakness of the recovery. Since 1990 real interest rates have come down below their 1980-92 average which must be a cyclical boost. Since January 1990 the United States has cut interest rates by 4%, Canada by 8%, the UK by 5%. Japan cut rates seven times by nearly 5% in total between early 1991 and late 1993. Yet despite this, the effect so far is weaker than in previous recovery phases of post-1973 business cycles. Persistent budget deficits and overhanging debt is likely to keep real rates high in the 1990s. This will keep the cost of capital high, squeeze industrial profits and cramp recovery.

Weak consumer spending (hampered by debt, unemployment and real wage stagnation) will constrict market growth and dampen investment projects. The fiscal policies of governments are usually relaxed in the trough of a recession and this acts as stimulus to recovery, through tax breaks or increases in government spending.

This time there has been fiscal tightening in the EU (following the German government’s massive unification spending) and the stance of the USA in this recession has been deflationary. Japan’s reflationary packages (one in 1992 and two in 1993) are not big enough to act as a locomotive for the G7 economies.

The Uruguay Round of GATT was meant to conclude its agreements in 1991 after five years of negotiation. It was finally concluded, with important gaps, in December 1993. Failure here would have been a huge blow to recovery hopes, deepening the prospect of an agricultural trade war in the first instance. The success at GATT will boost the cyclical upturn.

Further trade liberalisation with the ex-Stalinist states will only exacerbate the problem of global excess capacity in agricultural foodstuffs and basic industries, intensifying competition. However, preserving this capacity through protectionism will only depress profit levels and hinder accumulation.

The world economy has not as yet entered a new generalised boom phase. Japan is still dumping goods on world markets in order to escape the recession. This and the risks that have accumulated in the financial sphere still carry the danger of a relapse into a generalised recession.

Major uncertainties exist due to the vast speculation in financial derivatives and the concentration of financial markets around a small number of commercial banks (e.g the collapse of the bank Metallgesellschaft, Kloeckner, Schneider, in Germany). In the future violent fluctuations in exchange rate levels on the international currency market seem to be inevitable.

The fluctuations in the dollar/yen exchange rate mirrors the lack of confidence in the capacity of the Japanese government to introduce the necessary reforms to open their domestic markets. The weak dollar gives rise to fears on the part of speculators that panic sales of US government bonds (purchased by the commercial banks during the period of low interest rates to cover past losses) could erupt in anticipation of their devaluation.

As a consequence a strong rise in interest rates would increase the cost of the loans necessary to prop up the dollar and could eventually smother the US recovery along with the capital and stock market. The soaring yen, a curious phenomenon against a background of recession, is holding back the Japanese banks‘ ability to recover after the slump in real estate prices badly affected their assets.

The high valued yen is driving export industries into a corner and thereby aggravates their payment problems. The Tokyo banks could be forced to sell their securities, further weakening the recovery.

In short, the cyclical upturn after 1994 will not overcome the inherited problems of the post-1973 period. On the contrary, these problems will constrain and shape the nature of the forthcoming cycle. If the G7 countries are to overcome these systemic barriers to accumulation then they must first of all address the central problem of massive overcapacity in most industrial sectors.

Attacks upon wage and employment levels of G7 workers are motivated by the need for each multinational corporation (MNC) and imperialist country to improve productivity and hence market share and profits. But success along this road only contributes to the problem of excess capacity in each sector and country.

A sharp clash between countries is thus foreshadowed in this contradiction.

Those countries and MNCs that have delayed launching an attack on their own workforces now face the necessity of delivering more severe attacks precisely against proletariats which are as yet unbeaten on the field of economic struggle. These attacks—when they come—will generate a revival of class struggle creating the objective conditions for a powerful political revival of the workers’ movement.

Interacting with this economic pressure will be the increased political rivalry between the imperialist powers that will, step by step, replace the US-organised “harmony” of the previous forty years.


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