En Passant

Is this a minor upswing in the Great Recession or its end?

Certainly stock markets around the world seem to think the worst is over for profits. They are rallying.

Green shoots talk is growing among economists and some politicians too. 

Access Economics in Australia thinks we have dodged the recession bullet.

Their prediction for next year for unemployment in Australia is now 7.5 percent, not the 8.5 percent of 3 months ago. (I should add that other economists disagree and say this 7.5 percent figure is too optimistic.)

The RBA is cautiously optimistic. 

Its July minutes say this about the global economy:

The information available to the Board at this meeting provided further evidence that the global economy was stabilising. Importantly for Australia, the Chinese economy was growing quite robustly, partly due to strong public-sector construction, and production had also picked up in a number of other Asian economies… Members’ assessment remained that the most likely outcome for the world economy over the next year or two would be subdued growth…

As to the Australian economy, they said:

Recent information on the domestic economy suggested that economic activity was not as weak as had been expected. Exports had been surprisingly strong, which primarily reflected demand from China. Some mining companies and ports were reporting that they were again operating close to capacity. Household spending had increased due to the effects of the fiscal stimulus and low interest rates, and most indicators for the housing market suggested that demand in that sector was picking up. Housing loan approvals had recorded a strong increase, and house prices were again picking up, with the rises becoming more widespread. Both consumer and business confidence had rebounded strongly from their low points. The outlook thus remained for a gradual recovery to begin later in the year, and downside risks to that had diminished. Labour market indicators were likely to remain soft for some time, though there were signs that employers were making efforts to minimise job shedding.

So for Australia at least the ‘recovery’  is based on Chinese growth and improved business and consumer confidence.

The recent Chinese announcement of a 7.9 percent increase in GDP last quarter has to be treated with deep suspicion. 

It comes just two weeks after the end of the quarter. This makes the figures suspect of themselves.

The dictatorship has said in the past that it needs 8 percent growth per year to avoid social disturbances. 

There needs to be that level of growth to soak up new entrants onto the employment market and to continue employing the rural ‘guest’ workers in the cities. 

 7.9 percent looks too close to 8 percent to be believable.

Even if it is there or thereabouts it is built on the back of a massive stimulus package, one that cannot be repeated. The real question is will this stimulus to domestic demand hold up or peter out?

 A recovery in Australia based on growing business and consumer confidence might well be built on mass delusion.

Now it is true that that delusion might have some basis in reality – the Government’s stimulus package may have improved the outlook in the short term and the first home owners grant may have propped up the housing price bubble for a while. 

As we have argued elsewhere however that doesn’t mean the long term outlook is good.

Certainly the Government continues with its repetitive refrain – we are not out of the woods yet.

For example the IMF, as Treasurer Wayne Swan reminds us, is predicting a fall in global GDP of 3.8 percent. (I thought it was more like 1.8 percent but 3.8 percent is what Swan said.)

In an interesting article called ‘Jobs catalyst of a domino effect’ (The Australian Financial Review Monday 20 July Opinion p 55) Professor Nouriel Roubini from New York University argues that the real guide to the economy is unemployment. He says:

A sharp contraction in jobs and labour income has negative consequences on both the economy and financial markets.

He goes on to say: 

So, even as mounting job losses undermine consumption, housing prices, bank balance sheets, support for free trade and public finances, the room for further stimulus is becoming narrower.

Professor Roubini, unlike Access Economics, warned about the possibility of a recession well before it happened. 

He finishes his article with this comment:

The irrational exuberance that drove a three month bear market really is now giving way to a sober realisation among investors that the global recession will not be over until year end, the recovery will be weak and well below trend, and the risks of a double-dip W-shaped recession are rising. 

Other underlying indicators are not good.  Unemployment in the US is likely to hit double digits soon. 

The capacity utilisation rate around the world is low. This means that the factories and mines and so on aren’t producing at ‘normal’ levels.

Global financial losses are huge. As Don Argus (one of the pre-eminent Australian capitalists) put it recently:

The IMF expects write-downs in the global exposures of the financial services sector to be $4 trillion. That is a massive amount of losses.

So far only about one third of that amount has surfaced in lending institutions accounts.

Argus also thought that Australia’s dependence on overseas capital in a time of global financial crisis would create real infrastructure problems in the near future, problems that could not be addressed by targeted Government infrastructure spending alone.

In Australia the terms of trade collapsed last quarter by 30 percent.  Even though we were trading more we did so at much cheaper prices thanks both to the Australian dollar and lessening demand for minerals.

The Rudd Labor Government has so steadfastly refused to change its unemployment forecast of 8.5 percent by the end of next year. That is a doubling each month of the number of people currently losing their jobs.

What is interesting among all of this talk by bourgeois economists is any discussion of the missing link – profit rates.  As readers will know we on this site thinks that the problem is low profit rates, a systemic consequence of capitalism. 

The ways capitalism addresses this are various – good destructive wars are one way, as is massive unproductive arms spending – but there are two other important counter-tendencies to falling profit rates.

One is to drive down workers’ living standards.  The Fair Pay Commission decision not to increase the minimum wage is an example of this.

Another is the cheapening of capital. 

As the recession worsens, more and more capital goes bankrupt and stands idle.  This gives the remaining capitalists the opportunity to buy up other companies on the cheap.

That for examples explains comments now doing the stock market rounds about mergers and acquisitions being on the agenda.  

The share price to earnings ratio in Australia is historically around 15 to one. At the moment it is about ten to one and some see this as a real opportunity to buy up productive capital cheaply.

Of course the present ratio might represent the reality of an economy in terminal decline.  But if enough speculators think the time is right to buy, this can artificially inflate the stock market for a time.

But only for a time because the productive process will assert itself. 

It’s all very well buying up a competitor on the cheap but if there are no purchasers for their products it is wasted investment.

Profit rates in the developed world are low and have been so for a long period of time.  This has produced an up and down economy over the last 30 years, one in which most of the benefits of any boom have gone to capital.

But each recession has been worse than the last, especially as the State prevents a thorough going clean out of the Aegean stables of capital.

Roubini might be right. 

This might be a W-shaped recession, with the W moving towards a w.

Readers might also like to read Corey Oakley’s article Forget green shoots: global freefall continues.