By Eric Byl, ISA International Executive
At the World Economic Forum in Davos Gita Gopinath of the IMF surprisingly announced that the fund would upgrade its economic forecast. This follows after months in which growth expectations were being downgraded by a whole range of international institutions. So much so, that there has probably never before been a recession that was so widely expected. Less than 3 weeks earlier, Gita Gopinath herself had repeated that one third of the world was expected to go into recession and that even in countries that would not technically be in recession, for hundreds of millions it would feel like one. This made commentators conclude that by the time of its typically updated outlook for Davos the IMF would further downgrade, not upgrade, its world outlook. What happened?
Two-thirds of chief economists surveyed by the World Economic Forum considered a global recession likely in 2023, 18% thought it extremely likely. 73% of CEO’s thought global economic growth will decline over the next 12 months. Gopinath’s task during this highly concentrated mass of potential investors and political decision makers was, of course, not to further exacerbate the depressed outlook of those attending at the risk of contributing to a self-fulfilling prophecy. She needed to lift morale and did indeed quote a number of developments that could temporarily point to a less catastrophic direction. Amongst them the end of China’s zero-Covid policy, the launch of a ‘green’ investment boom in the US, and a less painful adjustment by Western Europe to Russia’s war in Ukraine.
It is hoped that the rapid reopening of China’s economy will lead to a spending spree and a bounce back. Especially as since the start of 2020 household savings are up 42% equivalent to $4,8tn. — an amount bigger than Germany’s GDP. Over the past period, because zero-Covid policy crippled the economy resulting in record high youth unemployment, China has not been confronted by an uptick of inflation and actually reduced its interest rates in contrast to the world trend. This went together with measures to prop up its collapsing property and land sales market. In fact, state-run banks pledged an estimated $256bn in potential credit to selected developers.
In the US the $369bn mix of subsidies and tax credits contained in the Inflation Reduction Act (IRA) as well as the $52bn of manufacturing grants and research investment in the CHIPS act are huge sums and feeding the appetites of financial investors. Both are aimed at keeping ahead of and outpacing China. It has been called “tech-nationalism”.
The mild autumn and winter in Europe (and the US) helped it to fill its Liquid Natural Gas storage capacity to 88%. This brought down energy prices from their peak in August, while countries in the European Union have earmarked and allocated about €600 billion of support since September 2021 to shield consumers and business from soaring costs. All this as well as Ursula von der Leyen’s announcement that Brussels would temporarily water down state aid regulations and subsidize strategic climate-friendly business in reaction to the US-IRA eased the disastrous outlook for the European economy.
These are real developments which can and will impact the timing and provisionally the depth of an impending recession. They are, however, largely state driven and of a conjunctural character. They will not remove, let alone resolve, but rather strengthen the underlying structural weaknesses which will sooner, rather than later, burst with invigorated strength onto the scene.
How the global economic outlook has evolved
The manifestations of these weaknesses were actually what drove international institutions to review downwards their outlooks from the latter part of 2022 onwards. In October the IMF reduced its projection of world growth for 2023 to 2,7%. This would make it the lowest growth figure of the 21st century except for the 2020 pandemic (-3%), the 2009 Great Recession (-0,1%), and the 2001 dotcom recession (2,5%). The IMF added that risks to this outlook were unusually large and on the downside.
Then, the United Nations Conference on Trade and Development (UNCTAD) predicted 2023 global growth to drop to 2,2% adding that this would leave real world GDP well below its pre-pandemic trend involving a $17tn loss, equivalent to nearly 20% of the world’s yearly income. The World Trade Organisation warned that global trade was projected to slow sharply in 2023 under the weight of high energy prices, rising interest rates, and war-related disruptions. It reduced its global growth forecast to 2,3% with the warning that a sharper slowdown was to be expected if central banks raise interest rates too sharply in their efforts to tame high inflation.
Today it seems that only some of the more serious economists still use it, but until a decade ago, taking into account population growth, relatively higher growth figures in developing countries, and replacement investments* global growth below 2,5 — 3 % was considered to define a global recession. Otherwise not even the severe downturns in 1974–75 (0,6% global GDP growth in 1975) and 1981–82 (0,4% global GDP growth in 1982) would have qualified as global recessions.
*replacement investments are to restore what has depreciated, without expanding production capacity
The Peterson Institute has predicted a lower figure, with a projection of 1,8% global growth for 2023 with recession in the Eurozone, the US, the UK, and Brazil. The Institute for International Finance (IIF) put 2023 global growth at 1,3% and calls it another ‘Great Recession’.
Then in the second week of 2023 the World Bank announced that the risks it had warned about 6 months ago had materialized, and that its previous worst case scenario had become its baseline, putting world growth for 2023 at 1,7% as opposed to 2,9% 6 months earlier. The World Bank added that this would mean the decade would be the first since the 1930’s to experience two global recessions. It quoted high inflation, high interest rates, reduced investment and disruptions caused by Russia’s invasion of Ukraine as the main culprits. It added “a large menu of risks” and pointed out that a further 1% increase of average global interest rates, now at 5%, would reduce global growth to 0,6% which would mean a contraction of 0,3% in per capita terms.
Livelihoods of millions reduced
But even if, on the basis of the conjunctural developments described above, the major economies were to succeed in kicking the can further down the road to postpone an immediate slump, this would mean little for billions in the Global South and still reduce the livelihoods of millions in the ‘advanced capitalist countries’. According to the International Labour Organization in 2022, for the first time since comparable records began in 1999, global real wage growth became negative as wages have been unable to keep up with surging prices.
Real wages per employee in the US fell 2,2% year on year between the 3rd quarter of 2021 and the same quarter in 2022. In Germany (-4,3%) and Spain (-5,4%) the fall was even bigger. Even in France where price caps were introduced early on out of fear of social explosions, and in Belgium where the capitalist politicians failed to break the resistance to the complete abolition of the essence of the sliding scale of wages, real wages fell by 0,8% and 0,6% respectively. Since the end of the pandemic real wages in the Eurozone have fallen by 8%.
Labour’s share of global income also declined as 2022 showed the largest gap recorded since 1999 between real labour productivity growth and real wage growth. While the erosion of real wages affects all wage earners, it is having a greater impact on low-income households which spend a higher proportion of their disposable incomes on essential goods and services, the prices of which are increasing faster than those for non-essential items in most countries.
It is well recognized that inflation increases inequality, but recent studies also confirm that inequality tends to aggravate inflation for several reasons. The main one being that poorer households cannot afford to spread expenses as they are proportionally more dependent on essential goods, and also because they hold more nominal assets as a fraction of total income than the wealthy.
Until now wage growth has lagged behind price growth and thus has not stimulated but moderated inflation. There is no wage-price spiral, it is profits that have risen sharply as a share of value. If anything, there is a profit-prices spiral and demands for higher wages are but a reaction to compensate for earlier price hikes.
Inequality unleashed
In contrast, the annual report on inequality released by Oxfam to coincide with the World Economic Forum illustrated that the world’s 1% super-rich over the past two years have gained nearly twice as much new wealth (63%) as the remaining 99% combined (37%). Only 10% of new wealth went to the poorest 90%.
According to Credit Suisse, by the end of 2021 total global personal wealth reached $463,6tn. That is 4,5 times world annual output, 47,8% of which is owned by the top 1,2%, some 62,5m people. This contrasts with the 24% taken by the bottom 87%. Oxfam also points out that for every $1 raised in taxes only $0,04 comes from wealth taxes while the top income tax rate went from 58% on average in 1980 to 42% presently across the OECD countries, and 31% across 100 countries.
Oxfam has calculated that a 5% wealth tax on the world’s multi-millionaires and billionaires could raise $1,7tn a year, enough to lift 2 billion people out of poverty and fund a global plan to end hunger. Even though the self-proclaimed “Patriotic Millionaires” received outsized media attention during the WEF with their call to tax them, to turn this into reality would require mass struggle on an international scale, and a working class threatening to abolish capitalism altogether. In other words, instead of limiting the struggle to modest reductions in the mind-blowing inequality, it is necessary to eradicate capitalism, its root cause.
Price hikes — what drives them?
In September 2022, the European Trade Union Confederation calculated that the average annual energy bill exceeded more than a month’s wages for low paid workers in the majority of EU members’ states. In some cases, it was more than two months wages. The Belgian consumers’ shopping basket by the end of 2022 was 18% more expensive than at the beginning of the year. Housing services inflation in the US was 7% and rising, but this figure belied the real impact of housing. The average mortgage payment was up 77% in October compared to last year. In the neo-colonial countries, food and energy shortages provoked no less than catastrophes.
There are many factors driving the price hikes. The invasion of Ukraine by Russia made food and energy prices soar. Between 2020 and March 2022 the UN Food and Agriculture Organization (FAO) food price index had risen by 60%, for cereals by 70%, and for vegetable oils by 150%. But while the price hikes were certainly aggravated by the war, they predated it.
Supply chain disruptions became a major inflation driver as soon as the economies opened up after the pandemic. By the end of 2021 the Federal Reserve Bank of New York’s global supply chain pressure index reached 4.30 points coming from a 0,10 points low in October of that year. This was considered temporary or transitory, the result of the pandemic lockdowns which would soon dissipate, but there was much more at play that made inflation far more stubborn than expected.
Over the past decades of neoliberal globalization there was a high global integration of production. Between 1980 and 2002 world trade more than tripled while world output doubled. Worldwide Foreign Direct Investment (FDI) reached $1,4tn by the end of the nineties as opposed to $5bn annually in the eighties. Global capitalism took advantage of the capitalist dictatorship in China offering cheap, well-educated slave labour. China’s use of FDI multiplied 60 times between 1983 and 2018. Asia became the largest continental economy from 2010 onwards and bypassed Europe’s and Northern America’s combined economies in Purchasing Power Parity GDP.
In a certain sense Western imperialism fell victim to the very forces it unleashed as the forces of globalization diminished the relative economic dominance of the US, and Europe in particular. The Great Recession of 2008/9 was a turning point. From then on, China was no longer seen as a gigantic cheap sweatshop for the world, but as a major competitor and a threat for global dominance. Globalization reached its peak. World trade instead of being a driver, became a drag on the economy. The resulting New Cold War is an attempt by the old empires to strike back. As a US spokesperson said “we want a new globalization that works for us.”
Global integration of production requires stable international relations, but those have gone with the accelerating US/China New Cold War aggravated by the war in Ukraine. Nothing indicates that tensions will recede, on the contrary. We are in the midst of an economic war over semiconductors and electronic chips, with growing disputes about who has access and dominates economically, technologically, military, on and below the earth, sea, air, and in space.
US president Biden in October 2022 was crystal clear when he called this decade the decisive one, the challenge being “no less than the undoing of the American-shaped world order by China”, the “greater threat to world order”. Russia, he says, represents “the acute problem”, both of them bound to draw closer.
This means economic nationalism, the use of environmental and social legislation to protect one’s own interests as well as more classical protectionism through customs tariffs; re-, near — and friend-shoring, decoupling and de-globalization; forms of national industrial policies through selective investments. These have not reached the scale of those during Roosevelt’s New Deal as the economic space is simply too limited by the already historically high debt levels. Nevertheless, there will be more elements of state intervention, to finance increased militarization and to counter revolts against the system.
Just-in-time production, which was so lucrative in previous decades by reducing costs and prices, liquidating stocks and storage capacity, has turned into its dialectical opposite. From a factor stimulating global trade it has turned into one aggravating supply-chain disruptions and pushing up production costs and prices. The gap between supply and demand became the main driver of inflation. If not dealt with, it could end in a period of stagflation, economic stagnation or contraction combined with high inflation.
The struggle against inflation revisited
It was this specter which convinced the US Federal Reserve (Fed) and other central banks to shift from a loose cheap money policy and quantitative easing to quantitative tightening. It was done quickly and sharply, historically fast, and was meant to reduce household and business demand to bring them into line with supply. But this approach will complicate debt repayment for countries, companies, and consumers alike. It will provoke a flight to safety by financial investors and as such inevitably hit the supply side too. Eventually inflation will recede but only to be replaced by higher unemployment and bankruptcies.
This approach recalls the strongly ideological shock therapy applied by former Federal Reserve Bank chair Paul Volcker in the early 1980s. He increased interest rates to 20% which, corrected after inflation, meant that real interest rates went from negative to 5%. Within three years, inflation had decreased from 13 to 3% but unemployment doubled to over 10%. In Latin America it provoked the ‘lost decade’. When asked at the time whether his policy would work Volcker replied “yes, through bankruptcies.”
But even that is questionable. At least as important was the defeat inflicted by then US president Ronald Reagan on the air traffic controllers in 1981 and in that way on the whole workers movement. Furthermore, during Reagan’s presidency, the federal debt didn’t decrease but nearly tripled from $738bn to $2.1tn. The US, which until then had been the world’s largest international creditor, became its largest debtor nation.
For that reason, the forerunners of ISA ironically questioned Reagan’s monetarist claims and called him a negative Keynesian. Keynesian because he applied a spending policy, but negative as he didn’t spend on services, wages or grants, but on corporate subsidies, especially for the arms race, and tax reductions for the rich. UK-prime minister Margaret Thatcher applied a more classical monetarist policy resulting in the total wreck of the UK’s industrial base.
Marx and inflation
Marx never published a comprehensive theory of inflation, but he did not subscribe to the monetarist view that money supply drives prices. He argued instead that it is prices which determine money supply, as prices represent the amount of labour required to produce goods and services. When investment in real production increases the amount of goods and services in circulation, money supply will have to follow suit, actually at a slightly higher level in order to lubricate the market.
The illusion that simply printing money will automatically lead to an equivalent investment to drive up the production of goods and services, the holy grail of Modern Monetary Theorists, is proven to be overtaken by reality. As expected, this only devalues the amount of labour money represents, what we call inflation.
Cheap money creation has been going on since the Great Recession of 2008/9. Then real interest rates were lowered to zero or negative and, using quantitative easing, the Fed and all other major central banks monetized outstanding debt. The only reason why it didn’t provoke inflation back then is because most of this extra money was siphoned off to the stock markets where it led to asset inflation.
But when this additional money finds its way into the real economy, its multiplier effect — the fact that money never really leaves circulation, unless hoarded, and jumps from pocket to pocket — causes the speedy overheating of the economy as expressed through galloping and, in some cases, hyper-inflation.
Marx also rejected the classical Keynesian thesis that inflation is wage driven and pointed out that the struggle for wage rises only results from previous changes in prices, productivity etc. He saw the economy as a far more complex interplay of contradictory forces.
Today there are many factors interacting which nourish inflation, from the New Cold War and the resulting process of deglobalization and decoupling, to demographic shifts, climate disruption, the new arms race, the historical degree of inequality between and inside national states, the debt burden, financial speculation, the concentration of wealth in fewer hands and above all the over-accumulation of capital, which results in a tendency for the amount of profit realized per unit of invested capital (the rate of profit) to fall and a historically low level of investment in real production.
The fact that neoliberal austerity as well as money creation both only cause new problems illustrates how the development of society enters into conflict with private property of the means of production and the limits imposed by outlived national states.
Protracted, hard landing possibly postponed but increasingly inherent in situation
Quantitative tightening surely contributed to easing the US inflation rate which has clearly peaked and is falling. In December year on year inflation was 6,4%, down from its peak of 9% in the summer. But there are other factors that contributed as much. Food and energy prices slowed the most, in the latter case because an unusually warm winter in the US and Europe reduced demand for Natural Gas. Last month alone, gas prices dropped by over 50%, already energy producing companies are in discussion over limiting production in an attempt to push up prices.
Core inflation, which excludes food and energy prices, also peaked, but not to the same extent, especially as housing costs continue to accelerate while the prices of other services fell only moderately. Also, the supply shock to prices, while remaining, was due to fall at a certain stage and did so. By December 2022 the New York Fed global supply chain pressure index was down to 1.18 points, still way higher than at any time before the Pandemic, but much less than the year before. Finally, inflation will also subside as the major economies slow down.
Does this mean that all problems are over, inflation is being tamed and even though growth might be low in historical terms a slump has been avoided?
The number of indications that the major economies could narrowly escape an immediate slump and possibly avoid a recession in the first half of the coming year has certainly increased over the past weeks. However, there are still at least as many major hurdles that could tip the balance in the other direction. While accepting that “the mother of all stagflationary crises” could have been postponed — but not avoided — Nouriel Roubini, alias Dr Doom, has been systematically pointing to the explosion of deficits, borrowing and leverage that has continued over decades.
Global private and public debt as a share of world GDP rose from 200% in 1999 to 350% in 2021 and is now 420% in the advanced capitalist countries, 330% in China. In the US it is higher than during the Great Depression. This touches everyone. For decades households were told to spend their future incomes, corporate and high-income taxes were cut while spending increased, debt was favored over equity with an ultra-lose money supply. In the past decade alone, global debt rose by US$90tn, while global GDP grew by only US$20tn.
In response to the 2020 pandemic crisis, Central Banks injected trillions of dollars into the economy, nine times as much as during the Great Recession of 2008/9, to avoid a financial crash. In addition, governments increased public spending to stop the system collapsing and cushion its effects so as to avoid social eruptions. During that year global debt rose by 29%, the largest one year increase since World War II.
It means that many borrowers — households, corporations, banks, shadow banks, governments and entire countries — became zombies that were kept alive by zero — or negative interest rates policies, quantitative easing and fiscal bailouts. As quantitative tightening is rolled out, they will face sharply rising borrowing costs, falling revenues and declining asset values, all simultaneously.
During the Great Recession of 2008/9, the G20 was able to face it off using concerted policies which are now excluded as global tensions rise. At that time China launched a major stimulus, but now the state-capitalist model in China is broken as illustrated in its ongoing housing crisis. Even if the end of zero-Covid means a certain bounce back of the economy, apart from the question of when the spending spree will peter out and whether this might not lead to China chasing to catch up with global inflation.. China has become a major debtor.
Simply bailing out private and public agents, as has been done in a number of cases, will over time further inflame inflation. A hard landing, a deep protracted recession in which the economic crisis and financial crash will feed each other, is still an inherent threat.
At the expense of a “systemic risk”
That this has not happened yet is partly because inflation has lowered the ‘real’ burden of borrowing costs. It is also because, despite increasing costs for borrowing and servicing debt, a tremendous credit boom took place in 2022, with a surge in US bank lending of $1,5tn.
Aside from bank loans, there was also an explosion in ‘low quality’ lending. Total non-financial US corporate debt stands at $12,7tn, with low-quality debt reaching 40% of the total. Non-bank financial institutions such as hedge funds and private equity firms now represent a very significant share of financial sector activity and pose “a systemic risk to financial stability”.
While this is also related to the flight to safety, to the US dollar, we should not see it as a sign of trust in the US economy. The fact that the yield curve on US Treasury notes has been deeply inverted for over a year now, that the yield on 10-year bonds is lower than short-term interest rates (3 months or 1 year), illustrates the lack of confidence. An inverted yield curve is considered a good indicator of a coming slump. All of the last eight recessions were preceded by yield curve inversions.
This has also been stimulated by the fact that corporate profits, which had stopped rising through 2019, and then plunged 15% during the pandemic slump, recovered to 40% in 2021. US non-financial corporate profit margins reached multi-decade highs as the opportunity was seized to raise prices while wages lagged behind. As a result, US firms were able to cover their debt servicing costs comfortably. By the 3rd quarter of 2022 however, profits growth slowed to 3,4% and will probably continue along that path.
Already the stock prices of tech leaders like Tesla and Meta have fallen sharply. As a whole, the tech sector has shed over 200.000 jobs. The tightening of credit has cast serious doubts over the Ponzi-like crypto mania. By the beginning of the year, the market capitalization of crypto tokens had lost 70% of its November 2021 peak. While this might partly re-equilibrate at a lower level as a slump seems to be less immediate, this is only an outgrowth of speculation replacing productive investment in times of economic decline. For the crypto market to regain the dynamic of past years, a much more robust phase of growth would be required which is excluded for the time being.
If over the next months, central banks continue their monetary tightening we could see increased difficulties for companies in servicing their debts resulting in bankruptcies. More generally, if profitability continues to fall and leads to a fall in total profits, investment and employment follow. That is the strongest indicator of an impending slump. Tim Gramatovich, veteran investment chief at Gateway Credit, gave the markets a striking warning over this. While normally stock prices are considered healthy if they trade at 18 to 20 times of earnings, he estimates that today they should be traded closer to 10 times of earnings.
The tightening of monetary policy by the G7 central banks is more similar, in both speed and size, to those in the 1970s and early 1980s than any since. It could provoke a new crisis for the euro starting in Italy, its weakest link. It has already forced far-right premier Meloni to give up any Eurosceptic rhetoric, promising to continue Draghi’s policy. Moreover the appreciation of the US dollar has been particularly strong which, rather than being an indicator of economic health, is an expression of extreme pessimism in the world money markets as investors seek the ’least bad location’. It is also related to the fact that the US is still enjoying the dominant role of the dollar in international transactions, currency reserves and international loans.
Meantime in countries where the incomes of working people and revenues from business and exchequers are denominated in their own currencies, while expenditures on goods and services from the US or loan repayments increase, this has devastating effects. Already Sri Lanka, Zambia and Ghana have defaulted on their debt and Egypt and Pakistan are on the brink. The UN estimates that 2022’s interest rate increases in the US cut US$360bn of future incomes for so-called developing countries — excluding China.
According to the IMF about 15% of low income countries are already in debt distress and an additional 45% are at high risk of debt distress. Among emerging markets 25% are at high risk and facing default-like borrowing spreads. According to the World Bank the world’s poorest countries are expected to pay 35% more in debt interest bills this year to cover extra costs related to the Covid pandemic and a dramatic rise in the price of food imports. The number of people suffering food insecurity in low income countries jumped from 56 million in 2019 to 105 million in 2022.
There’s still a long way to go, but increasingly the dominant position of the US dollar is challenged by China’s yuan. For over 6 years now, as relations with the US have become more complicated, Saudi-China talks over yuan priced oil contracts have been on and off, but accelerated over the past year. This will be undermined by the weakness of the Chinese and also the Russian economy. Russia is trading its Urals crude at a 30 to 40% discount to the Brent, a loss of US$150bn this year. This could increase its budget deficit from 2,3% of GDP last year to 7% this year. But these figures have to be taken with a pinch of salt, until now the expected effect of Western sanctions, though impactful, have not even come close to resulting in what had been expected and predicted.
The main threat to the US dollar dominance at the moment seems to come from domestic causes, from congress failing to reach agreement to raise the legal debt ceiling. A technical default of the US would seriously damage the position of the dollar. In that sense the crisis of the political regime in the US is forcing itself onto the table of geo-economics.
In conclusion
While we cannot exclude that on the basis of conjunctural developments, mainly state-driven, at least in the Western capitalist world and in China, the can might be kicked further down the road for a few more quarters, it’s clear that all structural developments point in the direction of a deep and protracted global slump. Neither can we exclude that the structural weaknesses can, on the basis of events, still outweigh and nullify those conjunctural factors. Even if Chinese growth could turn out to be stronger than expected, it would not be seen as positive to the rest of the world, but rather increase inflationary pressure, greenhouse gas emissions and lead to an even hotter Cold War.
The capitalists, on both sides of the New Cold War, face these disastrous perspectives with political and other institutions which are deeply undermined, divided, and lacking authority. This leads to political and social polarization, to both left and right. Where the capitalist states still have some means to cushion the effects of the crisis, they will, but even there this will be challenged by those wings that stand for a more repressive and harder anti-working class policy, using divide and rule. The class struggle will become harder and more brutal, with no real space left for reforms, which will only be possible on a temporary basis after fierce struggle. Left and right will be tested out at a rhythm much faster than during the previous decades.
We’ve already seen explosive protests, often over issues of oppression but also, and more and more, triggered by economic issues, especially the cost of living crisis. Struggles over wages, working conditions and work pressure will be mixed with and stimulate struggles over democratic rights and opposition to oppression. These are the objective conditions that tend to bring the working class back to the fore as is happening today in France, the UK and, to a certain extent, in the US. From the working class point of view, if the capitalists were able for some time to postpone a major protracted slump, it would give us time to organize and prepare. This would be better objectively and inspire more confidence to struggle, while an immediate slump could have for some time more of a paralyzing effect, though even that would probably be of shorter duration than during the Great Recession of 2008/9.
