Will the World Economy Return to Normal Soon?
Despite optimism that normality is on the horizon, the horizon, after all, being an invisible line that divides the earth from the sky, keeps its distance as you move towards it.
President Donald Trump hailed jobs data showing a fall in unemployment that provoked a sharp rally in the U.S. stock market. When COVID-19 lockdowns began, markets fell, but have rebounded over the last two months.
The cause of this rally is that major central banks are pumping money and credit into the financial system. Banks and companies borrow at zero or negative rates with credit guaranteed by the State, so they face no danger of losses from a default.
In the U.S., the U.K. and across the European Union, governments have been bailing out hard-hit business sectors like airlines, auto and aircraft manufacturers, leisure companies etc.
Central banks provide the principal support mechanism for the financial system, propping up the leverage that grew rapidly between 1986 and 2006 – a period known as the “great moderation.” This combated low profitability in productive value-creating sectors of the world capitalist economy.
Companies increasingly switched funds into financial assets, while investors borrowed at very low interest rates to buy and sell stocks and bonds and make capital gains. Major corporations have been buying back their own shares to boost prices.
As a result, this “fictitious capital” rose in “value” while real value stagnated or fell.
Central bank monetary injections or “power money,” as a share of global GDP, grew from 3.7% of total money and credit to 7.2% in 2007, and bank loans and debt nearly tripled. From 2007 to 2019, this “liquidity pyramid” doubled again. It is central banks that have been driving the stock and bond market boom.
The COVID-19 pandemic quickly put economies into deep freeze. In response, bank balance sheets have grown again, by around $3 trillion (3.5% of world GDP). That will push global power money up to $19.7 trillion, almost a quarter of world nominal GDP, and three times larger as a share of liquidity as compared to 2007.
The fantasy world of finance bears little relationship to the production of value in capitalist accumulation. As U.S. stock markets climb back to previous levels, corporate profits in the pandemic are suffering a dramatic decline.
There is an optimistic belief promoted by governments that the virus disaster will soon be over. They suggest that, after a period of suffering, we will bounce back in 2021 and there will be a quick “return to normal.”
As the lockdowns have been relaxed or even ended in the U.S., many Americans are returning to work in the leisure and retail sectors after being furloughed for two months. Stock market traders assumed that a V-shape recovery would get underway.
However, at 13.3%, the U.S. unemployment rate is more than one-third higher than in the worst period of the Great Recession. Moreover, real total unemployment is more like 25%.
The U.S. Congressional Budget Office (CBO) expects the nation’s nominal GDP to fall by 14.2% in the first half of 2020, compared to its forecast in January. The CBO expects that the fiscal and monetary injections by the authorities, and the end of lockdowns, will reduce this loss to 9.4% by the end of 2020, and looks to a V-shaped GDP recovery in 2021.
However, it does not predict the pre-pandemic trend in U.S. economic growth to be achieved until at least 2029. This would represent a loss of 5.3% in nominal GDP, or $16 trillion in value, and, indeed, lost forever compared to pre-pandemic forecasts.
This equates to $8 trillion in real GDP terms. However, it also assumes there will be no second wave of the pandemic and no financial collapse as companies go bust.
Europe is not much different. Real Eurozone GDP registered a record decline of 3.8% in the first quarter of 2020. The ECB predicts a 13% GDP fall in the second quarter. Assuming lockdowns come to an end and fiscal and monetary measures stimulate the economy, the ECB expects Eurozone real GDP to fall by 8.7% in 2020, but to rebound by 5.2% in 2021 and by 3.3% in 2022.
GDP would still be around 4% below pre-pandemic forecasts and unemployment 20% higher.
In the “emerging economies” the outlook is just as bleak, if not worse. For example, in Argentina, GDP may fall to its 2007 level. And a minus 7% fall in GDP is forecast for Brazil in 2020, wiping out ten years of GDP gains. Brazil and Argentina will end up with a lower real GDP level than existed 30 years ago.
The level of profitability of capital is the most important indicator for economic health under capitalism. The first quarter figures for U.S. corporate profits showed the direction; they fell at a 13.9% annual pace and were 8.5% below the first quarter of last year. The key productive sectors (non-financial) saw profits fall by $170 billion. There was no increase in profits compared to Q1 2019 – and that does not take inflation into account.
The boom in financial markets is floating on an ocean of free credit provided by the State and central bank monetary financing. This credit is not feeding into rising economic activity. The credit-fuelled boom in fictitious capital has not driven faster growth in real value or profitability. Debt has built up much faster than any rise in value.
Keeping financial markets up is one thing; getting 35 million Americans back to work is quite another, particularly when most work in the glamor businesses propping up stock prices.
Before the pandemic, growth was on a downward trajectory and productivity growth was sluggish. These trends have been reinforced. The increase in debt stoked by the surge in central bank injections will act as a further drag on growth. Despite optimism that normality is on the horizon, the horizon, after all, being an invisible line that divides the earth from the sky, keeps its distance as you move towards it.
Michael Roberts is a London based Marxist economist. He published the “The Great Recession” in 2008 and “Essays on Inequality” in 2014.
Heiko Khoo is a columnist with China.org.cn.