frontline issue 4

Towards a Global Recession

One of the effects of the events of September 11th has been to accelerate the descent of the world economy into recession. However, it is important to recognise that this was not, as some commentators have tried to make out, the primary cause of the recession, but rather the last straw that broke the camel's back. As the Economist magazine stated (15/9/01):'The world was already moving dangerously close to recession - and this week's attacks in America have increased the risks' Jason Muir looks at the background to the latest downturn in the global economy.

Regular readers of the financial press will have noticed a distinct change in the mood of capitalist commentators over the past year. In contrast to the depressed tone of recent analysis, the Economist of a year ago seemed infinitely more 'irrationally exuberant' about the prospects for the global economy 'The world economy seems in remarkable shape. The economists at CSFB, an investment bank, are forecasting global growth of 4.4 per cent this year, the fastest since 1988' (Economist, 19/8/00).

The bitter reality, which has exposed the bankruptcy of these financial shamans, tells a very different story. The latest figures show that GDP for the euro area has come to a standstill. Combined with the 0.1 per cent fall in the US economy and 3.2 per cent fall in Japan, this indicates that output in the rich world as a whole has fallen in the second quarter of this year for the first time since 1990.

While capitalist analysts, businessmen and politicians continue to be wrong-footed on these economic developments, constantly revising their forecasts downwards, the roots of the current crisis were there for those not affected by free-market blindness to see.


The global business and governmental elite have collectively worshipped at the altar of a new world economic system supposedly transformed by ever-increasing productivity gains captured through the application of new technology, and capitalised through a constant intensification of global integration.

The US, with its miracle 'goldilocks' economy, was thrust forward as the proof of the pudding that a virtuous cycle of unending growth was possible on the back of the golden calf of new technology, accelerating productivity and increasingly globalised markets.

Increases in productivity of over 4 per cent for the US over the last 5 years were cited as evidence of this new economic phenomenon. In March 2000, Us Federal Reserve Bank chairman Alan Greenspan even declared 'When historians look back at the latter half of the 1990's, they will conclude that we are now living through a pivotal period in human history'The fact that the capital spending boom is still going strong indicates that businesses continue to find a wide array of high rate of return, productivity-enhancing, investments. And I see nothing to suggest that these opportunities will peter out any time soon.'

Unfortunately for Greenspan, his forecasts have been dashed against the hard rocks of financial reality. In the second quarter of this year, business investment in the US had plummeted by 15 per cent. Figures for US productivity had been revised downwards to a mere 1.9 per cent, far lower than the golden age of post-war capitalism which saw average productivity growth of 2.8 per cent, and barely higher than the average of 1.4 per cent for the 1975-1995 period.

The miracle of the US economy has been exposed as a cheap tourist attraction. Companies over-exuberant about future profits and cheap credit; consumers over-exuberant about ever-increasing advances in personal wealth through property and the stock market and therefore the amount they felt comfortable about borrowing; stock markets over-exuberant about the valuation of, and returns from, companies, especially those in the new economy.

The NASDAQ, the US stock market for high-tech shares, has plunged 60 per cent since its peak in March 2000. The reshuffle of the FTSE 100 this month will see the expulsion of eight new economy companies from the UK's leading stock market. Ericsson, who account for 8% of Sweden's GDP, have announced a cut of 20% in their workforce.

The collapse of the IT bubble has accelerated with the dawning realisation that the new economy is nothing more than an empty promise incapable of overcoming the old economy trends of boom and bust, which are an organic process within the capitalist economic system.


The development of recession in the US has been quick to impact and reinforce other trends in the world economy. In the wake of the East Asian-inspired crisis of 1997/8, the US became the life raft for the global economy. Its buoyant economy acted as a magnet for exports (especially information technology) and capital, providing a safe haven for the international financial system and allowing countries to use rock bottom exchange rates to massively increase exports (especially of information technology) and trade their way out of crisis. The investment bank Morgan Stanley has calculated that two-fifths of growth in world GDP over the last five years was attributable to this role of the US.

In the short term, this process allowed East Asia to stave off further crisis and recover more quickly than would otherwise have been the case. The long term effect, however, has been to increase dependence on the US market and therefore make the region more susceptible to the current American downturn. South Korea, for example, saw its exports jump from 30 per cent of GDP in 1996 to 45 per cent in 2000. The comparable figures for Thailand were 39 per cent and 66 per cent.

The downturn in the US economy has sparked a slump in exports, with Taiwan for example suffering a drop of 28 per cent. This export slump has in turn sparked generalised downturns in the East Asian economies. Taiwan is now technically in recession, with GDP falling by 6 per cent at an annual rate. Singapore is in an even worse position, with GDP plunging by 11%. Malaysia and Thailand are likely to follow into recession and the investment bank JP Morgan predicts that East Asia (excluding China) will have contracted in the second quarter and will do so again in the third.

The situation in Asia is magnified by the continued collapse in Japan, the world's second largest economy. Japan has been mired in a slump for much of the 90s, despite the application of radical monetary and fiscal stimuli. Despite this intervention, the latest figures show that the economy contracted at an annual rate of 3.2% in the second quarter. Given the downbeat nature of the global economic situation, it is almost certain to contract again in the third quarter.

The situation in Latin America also looks bleak, with Mexico and Argentina already in recession and Brazil heading that way after an annualised fall of 4 per cent of GDP in the second quarter. Mexico has been particularly badly hit, with GDP falling for three quarters in a row, in large part due to 25 per cent of GDP stemming from exports to the US.

Europe, despite the earlier predictions of economists that it would be insulated from a downturn in the US, has started to show signs of faltering. The German economy, the biggest euro economy, stagnated in the second quarter while the Italian economy shrank by 0.5%. Although things were better in France and Spain, there is concern that growth was close to zero in the second quarter for the euro area as a whole. With better figures than other parts of the world economy, there is some confidence amongst economists that prospects for Europe are not so negative. However, in the context of the generalised downturn in the world economy, the outlook for Europe looks to get worse before it gets better.

Overall, the global economy is moving into stormy waters with no prospect of any respite in the near future, especially given the events of September 11th.


The biggest problem is that the recessionary wave crashing around the world at present seems to be highly coordinated. In fact, the Economist (15/9/01) goes so far as to say that it is 'more synchronised around the world than at any time since the 1930's'.

In the early 1990's the recession in the US was counteracted by growth in Japan, Europe and emerging markets. As previously noted, when the crisis hit emerging economies in 1997/1998, the US continued to boom and Europe at least wasn't falling.

With the US, Japan, Latin America and most of Asia in recession and Europe heading in that direction it is difficult to see any lifeboats cruising by in the immediate future. Indeed, the prospects are for the tidal wave of recessionary effects to get bigger before it recedes.

In the US, stock markets are still overvalued. The ratio of share prices to earnings (operating profits) for US companies quoted in the Standard and Poor's 500 still stands at 23, indicating how far out of touch the markets are with the real earning potential of companies. This is greater than the peak of 21 reached in 1929 and way above the historical average for the past century of 14. With profits tumbling due to increasingly poor economic conditions, it is calculated that the S&P 500 would have to fall by 40% for shares to reflect the true value of company earnings.

Unemployment is on the up, from 4.5 per cent in July to 4.9 per cent in August. Retail spending, which makes up two-thirds of economic activity, had an annual growth rate of 10 per cent in early 2000. This has now been flat for June and July, while consumer credit fell in June. The housing boom, which has also facilitated consumer spending, shows signs of tailing off, with a sharp rise in mortgage defaults and an increase in the proportion of mortgage payments to disposable income from a low of 5.6 per cent to 6.5 per cent.

The overall effect will be to whip away one of the main supports to the US economy at a time of increasing vulnerability. This may add to an increasingly delicate situation for the US, where they have been continually cutting interest rates to pump liquidity into the economy. This has the potential to create a fall in the dollar as foreign investors sell their dollar assets, therefore increasing the cost of imports and hence inflation. At the same time, the bottoming out of investment rates and the resultant cut back in production may lead to a period of 'stagflation' (stagnation plus inflation) such as was seen in the 1970's.

This intensification of the recession in the US would lead to a vicious circle impacting on the rest of the world economy and then back to the US. This is largely due to the increased integration of the world economy. World trade over the last decade has grown 2.3 times faster than world GDP, compared to 1.4 times for the previous two decades. American imports make up for 6 per cent of the GDP of the rest of the world, double the proportion of 1990. In the first six months of this year, US imports fell by 13 per cent and imports of IT fell by almost 50 per cent. Additionally, the growing influence of multi-nationals has a key impact: with US companies' profits diving, they are increasingly cutting output and jobs in foreign climes. We have already seen the impact on Scotland, with companies such as Motorola and Compaq cutting thousands of jobs. The Japanese electronics firm Fujitsu has already announced a cut of 10 per cent of its global workforce (16,400 jobs, most of them outside Japan). Overall, the growth in volume of world trade is forecast to fall to only 3 per cent this year, well down on the 13 per cent of last year, and the sharpest slowdown since 1975.

In this context, there will be an increasing danger of protectionism, as countries attempt to prevent the spread of this economic disorder. George Bush, early on, has indicated his support to domestic steel producers against foreign imports.

Perhaps the most apt summation of the prospects for the world economy came from the headline of the editorial on the world economy in the Economist (25/8/01): 'Get a parachute', it advised its readers. In the time-honoured tradition, working class and poor people around the world will find that their masters have already grabbed the restricted number of parachutes and that they are the ones who are in for the hardest landing.