Will the world economy enter a new recession next year?

To sum up marxist Michael Roberts analysis, I took this extract. Scientific Discovery by Karl Marx’s law tendency of the rate of profit to fall is still the center of his interest :

«Presenting the outlook in Paris, OECD secretary general Angel Gurría said: “The slowdown in global trade and the continuing weakness in investment are deeply concerning. Robust trade and investment and stronger global growth should go hand in hand.” Catherine Mann, OECD chief economist said: “Global trade, which was already growing relatively slowly over the past few years, appears to have stagnated and even declined since late 2014. This is deeply concerning. Robust trade and global growth go hand in hand….“The growth rates of global trade observed so far in 2015 have, in the past, been associated with global recession.”

We also have the preliminary real GDP figures for the most important capitalist economy in the world, the US. In third quarter of 2015 (June to September) US economic expansion slowed sharply. The economy grew at a 1.5 per cent pace annualised pace in the three months to September, down from 3.9 per cent in the second quarter. The US economy has expanded in real terms over the last 12 months by just 2%, down from 2.7% in Q2 and business investment slowed to its lowest yoy rate for over two years; at an annual rate of 2.1% compared with 4.1% in Q2. And investment in new plant actually dropped 4% and investment in software and such rose at the slowest pace since 2013.

Meanwhile Japan’s economy contracted in the third quarter. Real GDP declined an annualized 0.8 percent, following a revised 0.7 drop in the second quarter. Again, the biggest worry was the weakness in business investment. This was the fifth ‘technical recession’ since Japanese PM Abe launched his ‘Abenomics’ and quantitative easing programmes. And in the Eurozone economic growth slowed to just 0.3% in Q3, from 0.4% in Q2.

And then we have the so-called emerging economies. I have reported on their demise in several previous posts. The policy of easy money and quantitative easing did not only lead to a stock and bond market boom in the major advanced economies, it also led to a similar boom in emerging economies as Asian, Latin American and ‘emerging’ European corporations borrowed heavily from cash-rich Western banks at cheap rates, mostly in dollars, to generate mainly a property and construction boom. Emerging market corporations now have debts near 100% of GDP on average, matching those for corporations in the advanced capitalist economies. But the commodity price boom upon which much of growth was based has collapsed. Global demand for oil and basic metals has slumped and this has spilt over into the demand for Asian exports. Export prices have slumped, currencies have dived and yet debts remain, mainly in dollars. And now the Fed is set to hike the cost of borrowing dollars.

So does all this mean we are heading for a new global slump? Well, I have raised the risk that a Fed rate hike could be the trigger for a new slump, just as it was in 1937 when it brought to an end to recovery from 1932 during the Great Depression of the 1930s. Only the preparations and beginning of the world war ended that slump.

The strategists of capital are not stupid. They have tried to estimate the likelihood of a new recession. Goldman Sachs pointed out that the current economic expansion — beginning in July 2009 — was now 76 months old. Using data since 1950, they calculate that the unconditional odds that a six-year-old expansion will avoid recession for another four years—and mature into a 10-year-old expansion—are about 60%. So the odds of recession over the next year are only 10-15%. And mainstream economic indicators for recessions using a range of economic variables suggest little likelihood of a slump in the US.

But this sort of indicator is pretty useless and it is backward looking, so recessions are on you before the data indicate them. And mainstream economics never forecast the Great Recession anyway. Indeed, we know that all the leading international economic agencies, the leading economists and investment gurus were predicting faster growth in 2007-8 as the global financial crash unfolded.

Moreover, in my view, modern capitalist cycles of slump to slump have not been just six years or less, but generally 8-10 years: 1974-5, 1980-2, 1990-2, 2001, 2008-9. If that were to hold again, then the next slump would not be due to start before next year at the earliest. And if the Fed’s rate hikes are to have an impact, they won’t be felt on the cost of debt and investment for at least six months.

It is best to consider the Marxist indicators that I have referred to: profitability and profits and business investment. There has been some debate in Marxist economic circles that profitability is not low or falling and that there is an excess not a dearth of profits in the major economies. I have discussed these arguments that the capitalist world is ‘awash with cash’ in previous posts. All I can add is that cash and profits are the not the same and profits and profitability are not either. I have not measured US profitability for 2015 and final proper data for 2014 is only just becoming available, but 2014 showed a decline, with rate still below the peak of 2007 and the higher peak of 1997.

I have shown before in previous posts that global corporate profit growth has nearly ground to a halt and in the US on some measures, it has gone negative.

The latest earnings results for the top 500 companies in the US confirm that both revenue and profits fell in the most recent quarter.

And as I have shown before, where profits go, business investment is likely to follow, with a lag.

Watch this space.»

Michael Roberts Blog

The US Federal Reserve bank is planning to raise its basic interest rate at its 15 December monetary policy meeting.  This will be the first Fed hike since 2006.  That fact alone shows how long and how deep has been the impact of the global financial crash of 2007-2008, the subsequent Great Recession of 2008-9 and the ensuing and seemingly unending long depression of below trend economic growth since.

For six years, the Fed has held its interest rate near zero to ‘save the banks’ from meltdown, to avoid debt depression like the 1930s and to revive the economy with cheap credit.

Ben Bernanke, the Fed chief at the time, continues to argue that this easy and ‘unconventional’ monetary policy did that trick.  Bernanke has recently published a book defending his strategy and does interviews for the same.

In this blog, I have analysed the success or otherwise of quantitative…

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