USA: economy teeters on the edge of recession
Global economy: recession hits USA and Japan
The two largest economies in the world are in recession at the same time. This has forced the Economist to lament: "The world economy is starting to look remarkably, even dangerously, vulnerable." During the first half of this year manufacturing in the United States has collapsed by 8 per cent on an annual basis. It is worse in Japan. It is in its fourth recession in ten years; GDP has collapsed 8.5 per cent on in the first six months of the year. One analyst said: Japan's economy is falling off a cliff".
Meanwhile, the EU zone growth is slowing and its powerhouse – Germany – in slowing fast. The prospect of all three engines of the world economy being in recession at the same time is an imminent possibility. One estimate even suggests that the total industrial output of the EU, Japan and USA actually fell by 0.5 per cent in the three months up to May.
The generally recognised causes of the end of the global expansion lie in the massive over-investment in most lines of plant and equipment, especially forceful after the flight of capital to the US in 1997-98, the fevered speculation in technology stocks (1999-2000) and Y2K investments.
The essential driver of demand was consumer spending. But given the relative stagnation of incomes this could only be achieved by drawing down savings (now at their worst - negative - rate ever) and borrowing on basis of rising equity holdings.
End of internet fever in April 2000 led to controlled slide in stock market and hence profits. With some time lag this worked its way through the rest of the year to a downturn in manufacturing investment and only by this spring - slowly - in consumer spending. Business fixed investment growth was 10 per cent in 1999 and 17 per cent in first half of 2000; then collapsed and was negative by Q4.
The collapse in investment has hit the capital goods sector hard and especially the technology sector. Profits have fallen dramatically. While in the US as a whole they are down around 14 per cent in the second quarter of this year compared to last year, in the technology sector they are down 40 per cent in the first three months and 60 per cent in the second quarter.
Oracle announced last month that its profits were 83 per cent lower than a year ago. Nortel, a telecoms equipment maker, announced the second biggest quarterly loss ever by a company – $19.2 bn.
Greenspan's emergency cuts in interest rates in January stabilised stock market sentiment until early March when his refusal to do so again sent New York stocks to two-year lows. A further 0.5 per cent cut in March was seen as too little by the markets and they continued their slide. By 22 March Dow Jones was 20 per cent down on the January 2000 high. Nasdaq was 60 per cent down on its all time high by mid March.
As a result of the steady slide in share prices since April 2000, more than $10 trillion in paper wealth (i.e. equal to the size of the US economy) has been taken out of the US economy.
In June the Federal Reserve cut rates again, but only by 0.25 per cent due to fears that inflation may be on the rise again.
Are these measures enough shorten the duration of the recession? Lower interest rate are always welcome to companies that borrow, as many do for investment.
But it is not going to tempt them to borrow more in the short term. Massive overcapacity will have to be worked off/ destroyed first. Similarly the banks do not want to lend until new debts of companies - exposed by falling stock market valuations – are restructured.
Personal tax cuts will help restore the negative savings ratio of households but they will take best part of a year to materialise and be felt in the economy.
So how long the recession lasts in the USA depends on the fate of the stock market, the degree of domestic US restructuring (closures and sackings) and whether the rest of the world can stay in expansion mode as US markets for their goods decline. At present, despite a wave of pre-emptive sackings in Q4 2000 and Q1 2001 the labour market for skilled and semi-skilled labour remains tight. Only now is unemployment starting to climb as companies cut the workforce back hard. But this may well be what finally brings consumer spending to a dead halt, ensuring the spread and intensification of the recession.
Japan' latest recession has occurred despite the massive public debt taken on in the last ten years ($1 trillion worth of public spending) to inject demand into the economy. Unemployment (5 per cent) is at an all time high and consumers refuse to part with their money for fear of further collapse and lack of social security system.
The new prime minister Junichero Koizumi has taken office promising to let the recession rip an do its work of forcing insolvent firms out of business and clearing the overhanging mountain of bad bank debts which have crushed profit margins for teen years and deterred investment. He says he is committed to cutting back on public spending.
If he carries this programme through then unemployment will soar and social stability will be put under severe strain; it may even provoke open working class struggle in a society which has suppressed it for much of the last fifty years.
Destruction, devaluation and take-overs of important industrial leading companies and banks are only just beginning to be seen inside Japan and have a long way to go before accumulation can resume.
The stagnation of the world's second largest economy and biggest exporter naturally closes down certain options for world growth should the US be in the early stages of a protracted recession.
More than 25 per cent of non-Japan Asia growth last year depended on exports to the US. This year growth rates will be halved or more in the region. Countries like Indonesia, already failing to cope with the effects of the 1997 crisis, will be hit again, adding more fuel to the political fires.
Stock market frenzy turns to fear [May 2000]
US capitalism: markets in denial (pdf) [Trotskyist International 25, 1999]
Modern capitalism and crisis theory [Trotskyist International 25, 1999]