Jürgen Roth, Neue Internationale 141, October 2019
The latest figures are startling. The capitalist world economy is heading for a crisis. It has already broken out in the manufacturing sector.
Manufacturing industry on the brink
The numbers from September bring it to light. The Purchasing Manager Index, PMI, in manufacturing, which includes industry, construction and crafts, has fallen below 50 in the major national economies. This mark is seen as the dividing line between expansion and contraction and PMI is considered a fairly reliable indicator of current output.
In the eurozone it fell to its lowest level since the euro debt crisis of 2012. In Germany, it is lowest at almost 40. Japan is going through similar experiences. The country’s central bank registered the lowest level for large companies in more than six years in the third quarter and for the manufacturing sector as a whole it is at the level of the mini-recession of 2016. The Markit PMI for the corresponding US sector is just over 50 and thus lower than 2016. Its counterpart, ISM, fell to the level last reached in the Great Recession of 2009. According to Boris Johnson, Britain has been „in the ditch“ for months. The PMI in Canada is also below 50.
“Smaller“ economies are also experiencing quarterly crashes: Malaysia, Mexico, New Zealand, Poland, Russia, Singapore, South Africa, Sweden, Switzerland, Turkey, Taiwan. The following countries even recorded a year-on-year decline: Australia, Brazil, Britain, Chile, Germany, France, Greece, Italy, Japan, the Netherlands, Portugal, South Korea, Turkey, the USA. The two fastest-growing major economies, China and India, also have their lowest GDP growth rates in over a decade. Their manufacturing sector PMI is just over 50.
The collapse of the manufacturing sector is partly the result of declining investment activity and partly of the intensifying trade conflict between China and the USA. The latter served as the trigger for the recession, but world trade had already slowed before, leading to a collapse in production in Argentina and Turkey, for example, and to the withdrawal of foreign investment and currency depreciation. Turkey is in the midst of a deep general recession. Argentina can no longer service its huge foreign debt.
Infectious disease?
But manufacturing, to which the recession in other countries has so far been limited, accounts for only 10-40 percent of most economies. The service sector, including trade, finance and business services, insurance, banking, real estate and tourism, is still keeping its head above water. This is why Greece, for example, is now recording modest GDP growth of 2 percent. However, this is meagre after a contraction of 25 percent due to the euro crisis. Compare this weak upswing with the USA which, 5 years after the trough of the Great Depression in 1933, achieved a 35 percent higher GDP per capita, or with Argentina where, 5 years after the collapse, the figure was up 45 percent. Greece has to make do with 6 percent and, at the current rate, will not return to its pre-crisis level until 2033. Even this will only happen if the service sector is not affected by the recession in the manufacturing sector!
Since this is usually dependent on manufacturing, such immunity is unlikely. The spillover into a generalised economic crisis almost always occurs. Moreover, industry is at the heart of all national economies, because it generates the added value that is then redistributed to other sectors. It is therefore the lynchpin of macroeconomic profitability.
Profit development
Analysts at JP Morgan (JPM) have recently collected unpublished figures on the development of global profits. Each of the 10 sectors of the overall market showed a sharp slowdown in profit growth. Half of them saw a year-on-year decline (especially in intermediate products and telecommunications). JPM draws the conclusion, not surprising for Marxists, that the decline in global economic growth last year coincided with an equally remarkable dip in corporate profitability. The stagnation or slowdown is still not as clear as in 2016, 2001-2002 or even 2009, but this is the trend. Wage costs are not offset by increased output in values, the value-added rate is falling. According to Marx, this profit squeeze is an early warning sign of an economic downturn. JPM comforts itself and its clientele with the idea that increasing productivity growth will reopen this gap. But that depends on an increase in investment. After the Great Recession, however, we are seeing the exact opposite!
The companies of the S&P 500 in the USA, the core of the global economy, have already had to report declines in sales in the 1st and 2nd quarters of 2019: Q1 at -0.3 percent, Q2, -2.8 percent. Small and medium-sized businesses suffered from the biggest slumps in profits. Even the technology sector, where the showpieces of the US economy such as Apple, Amazon, Google, Netflix, Microsoft and Facebook are represented, complained about declines in both sales, down 11.9 percent, and profits, down 1.1 percent. There is also a striking divide between areas where labour productivity is increasing (IT-based manufacturing, wholesale) and where it is stagnating (transport, construction, healthcare, education).
In addition, in recent years, the orthodox means of stimulating the economy have reached their limits and could now even exacerbate the crisis. In anticipation of low interest rates and the continuation of the central bank’s policy of providing cheap money to commercial banks through quantitative easing (QE), the stock market continued to boom. But this is a bubble that is not covered by profits. Over 80 percent of newly issued shares promised negative returns.
US economy
The figures for the US economy for the second quarter of 2019 appeared on 26 July, with GDP growing by only 2.1 percent, compared to 3.1 percent in the first. The annualised increase also slowed, from 2.7 percent in Q1 to 2.3 percent in Q2.
Trump’s corporate and income tax policy appears to have passed its zenith. The USA has fallen back to its 10-year average with the prospect of a further low. The main factors are weak investment activity and a decline in net exports. The trade conflict with China is taking its toll. Business investments fell for the first time since Q1 2016, down 0.6 percent. Ironically, the fall in fixed capital was much more drastic at 10.6 percent, although that was what was meant to be promoted by Trump’s tax-cutting programme!
The most interesting part of the GDP report, however, was its revision of the figures for the past three years. GDP increased by only 2.5 percent year-on-year in the 4th quarter of 2018. Instead of the 20 percent increase in corporate profits previously assumed for the last three years, it turned out that these had actually fallen below the level of 2014. In the 3rd and 4th quarters of 2018 they had declined before and after taxes. Profits outside the financial sector have declined in the last 5 years. Trump’s tax cuts have therefore only boosted speculative or fictitious profits in financial assets.
The connection between profits and investments is important: The latter follow the profit curve with a delay of about a year. Now it seems as if profits in unproductive sectors such as financial assets and real estate, which account for approximately 25 percent of all corporate earnings, are affected. By and large, these stagnated last year. Should they fall in the same way as in productive sectors, a fall in share prices on the stock markets could follow next year.
Other parameters, in addition to profit and investment curves, also point to a general economic downturn within a year. In the USA, for example, we have seen a reversal in earnings from securities since May 2019.
Another early indicator is the price of metals, especially copper. In the mini-recession of 2016 it stood at $200 per pound weight, 2009 at 150, early 2018 at 320, now it has fallen back to $250. This metal is used in practically all branches of industry so a fall in prices points to a decline in industrial production.
The inadequacy of capitalist cyclical policy
It is not surprising, therefore, that Trump and the head of the US Federal Reserve, Jay Powell, clash. Trump calls on the Fed to cut interest rates further in order to boost the economy. The Monetary Policy Committee itself is divided. Trump’s opponents worry that a too low interest rate will fuel a credit bubble that will inevitably burst with a big bang. In addition, they stress, global shocks such as a trade war cannot be fought with monetary policy.
Others warned that the influence of the US Federal Reserve and the dollar on weaker economies is so huge that smaller central banks cannot do anything about monetary policy without making things worse. The former head of the Bank of England, Mark Carney, has proposed an end to dollar dominance in financial and commodity markets. The U.S. only accounted for 10 percent of world trade and 15 percent of world GDP, but half of all commercial invoices and 2/3 of all insurance are denominated in U.S. currency.
Orthodox (low interest rates) and unorthodox (QE) mainstream economic policies are at odds with the (post-)Keynesians and supporters of modern monetary theory (MMT). The latter emphasise that the large economies remained in secular stagnation despite the recipes of their neoclassical counterparts. That is why the tax authorities have to take action. The state budget should go into debt in order to halt the collapse of demand. The supporters of the MMT favour printing money without cover by issuing government bonds.
However, both basic assumptions are wrong. It is not a weak overall demand that is to blame for the economic crisis. Household demand in most national economies is relatively strong. People are even increasing spending on consumption, partly supported by cheap loans. Rather, it is the other part of demand, the investment in business, that is visibly declining, and that is due to falling profitability, not falling consumer spending! The reduction in the price of credit, tax gifts for the rich and the super-rich as well as economic stimulus programmes (see Japan in recent decades) cannot change this.
Germany’s economy approaching the tipping point
Already today, the problem of the capitalist world economy is expressed in the fact that ever larger masses of capital are looking for profitable investments. Inflation-adjusted, $25 trillion no longer generate a return worldwide. If the Fed continues to lower its key interest rates, this sum is likely to rise to 30 trillion.
Even China is maintaining its (declining) growth rate only through massive government credit support. Its economic stimulus program in 2009, the largest in history, catapulted the total debt of the state, private individuals and companies from 164 percent of its GDP in 2008 to 271 percent.
The German economy has not benefited and will not benefit from any of the EU’s monetary policy measures. An end to the recovery on the labour market is in sight. Federal Labour Minister Heil (SPD) is already working on a „Good Work Tomorrow“ law to facilitate and restructure short-time work.
Export industry
The export industry is in recession. Within a few months, growth forecasts were lowered from over 2 percent to 0.7 percent. For 2019, the Federal Ministry of Economics is expecting GDP growth of only 0.5 percent. In autumn 2018, the figure was still 1.8 percent. By comparison, the economy grew by 1.5 percent in 2018. GDP had already fallen by 0.2 percent in the third quarter of 2018, without a recession having occurred at that time, a recession being defined as two quarters of decline.
In July, the manufacturing sector shrank more sharply than at any time in 7 years. According to the economic indicator of the Institute for Macroeconomics and Economic Research, which is close to the trade unions, the risk of recession was 36.6 percent in July and 43 percent by mid-August. German GDP shrank by 0.1 percent between the 1st and 2nd quarters of 2019. At the beginning of this year it was rising by 0.4 percent. Share prices, on the other hand, continue to soar.
The trade war, which is prematurely blamed for the misery, is more of an additional risk than the actual cause of this dampening of the economy. So far it has not broken out widely. The car sales markets are hardly growing, even in China. At the same time, the industry is being turned upside down by e-mobility and autonomous driving. The trade war, in which both sales markets and technological leadership (electromobility, platform companies, data, telecommunications) are being fought for, is the result of this mixed situation – a slump in sales and uncertain profitability for the future. Investment controls, export restrictions and the protection of intellectual property (patents) are used to fight over where future technologies will be located.
Against this backdrop, Germany’s industry is threatened with the collapse of what was long regarded as its successful business model: its massive focus on exports. Car exports declined by 14 percent in the first 7 months. In addition, the automotive industry and banks are undergoing deep structural change. It is also clear that the imminent upheavals and uncertainty in connection with the Brexit are having a dampening effect on exports to the United Kingdom. Demand from Italy has also declined noticeably.
Fighting the coming crisis
The construction, services and retail sectors are still doing quite well, but the industrial sector is doing worse. For the first half of 2019, the mechanical engineering sector reports a 9 percent decline in orders compared with the same period of the previous year and expects a 2 percent decline in production this year, which has not occurred since the Great Recession and the financial crisis. The same applies to the chemical industry. BASF plans to cut 6,000 jobs worldwide, half of them in Germany. Deutsche Bank has announced the end of thousands of jobs. There are also four-figure reduction plans at Bayer, Ford, Siemens, Thyssen-Krupp and VW.
Unemployment and short-time work threaten to increase drastically. The trade unions, however, continue to rely on social partnership. This time the packaging is called „future collective agreements“. In view of the coming recession in Germany and worldwide, they are burying their heads in the sand.
After the Great Recession of 2009 and the costs of the rescue programmes for big business and the global economy, the reserves of capitalist states and governments for countermeasures are much reduced, if not exhausted. The crisis will also further intensify competition, making a globally coordinated policy by the major powers almost impossible. Much more likely is that the fight to redivide the world will intensify as each tries to pass on the costs of the crisis to the respective competitors.
The next recession will certainly hit the working class and peasants, the masses in the imperialist-dominated countries. Environmental destruction and the danger of war will also increase.
The workers‘ movement must counter the bourgeoisie with its own anti-crisis programme, the struggle against all sackings, the reduction of working hours and the distribution of work among all, the expropriation of banks and corporations and a plan of useful, meaningful social and ecological public employment measures at collectively agreed wages and under workers‘ control.
Above all, however, it needs a politics of class struggle, of demonstrations, occupations, political mass strikes in the individual industries and countries – and the actions must be coordinated internationally from the outset. In the fight against a global crisis, it is not the solidarity with „national“ capital that helps, but only internationalism!