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Economy - 'Green shoots' are without real roots
"ARMAGEDDON IS behind us" commented Larry Fink, the owner and chief executive of BlackRock on the prospects for the world economy. His purchase of Barclays Global Investors makes his company the biggest money manager in the world.
His voice has joined a chorus of economists and finance ministers who claim that there are 'green shoots of recovery' showing that the end of the recession has been reached. Is this just the misplaced optimism of a businessman who, on falling out of an office on the fortieth floor, is heard to declare as he passes the twentieth floor: "Everything's ok so far"?
The National Institute of Economics and Social Research (NIESR) estimates that the economy grew by 0.1% in March and 0.2% in April. Several manufacturers have ended lay-offs and short-time working: Honda in Swindon has restarted production, Nissan in Sunderland has started to rehire workers, and Siemens in Congleton has recently come off a four-day week.
Analysts point to a strong pound that has risen 14 points since the beginning of the year as evidence of a rise in investor confidence. In addition there are reports of a turnaround in some sectors of the housing market. In London, some inner boroughs are reported as having price rises of around 30% and across England and Wales the fall in house prices has slowed slightly from 0.9% to 0.7% in May.
These are all indications that May was a better month than March or April but, as one manufacturer admitted, there may be "green shoots but no real roots". The bosses' CBI can't see a recovery in the short term, forecasting that the economy will shrink by 3.9%: "The return to growth is likely to be a slow and gradual one; difficult credit conditions are still affecting business behaviour," said Director General Richard Lambert.
Also, try telling workers that there is a recovery under way! The jobless rate in the US has risen to 14.5 million, 9.4% and in some states it is over 10%. In the UK it has risen by 232,000 this year to 2.3 million and is forecast to rise to 3 million by the end of the year. Housing repossessions have risen by 50% - there have been 13,000 in the first three months of this year.
The fall in the pound's value last year has made exports temporarily more competitive, lower oil and utility prices have helped to boost spending power and some housebuyers have benefitted from low interest rates. Cash generated in the car industry as a result of 'destocking' - selling off existing stock while production of new cars has slowed or stopped - may have provided a temporary uplift but that will disappear when production starts up again.
The conditions in the world economy, characterised by a crisis of overproduction, have not changed, however. This is underlined by a recent comparison of the decline in industrial output and world trade following the 1929 crash and the current economic crisis by economic historians Barry Eichengreen and Kevin O'Rourke. They show that the decline in industrial output from April 2008 tracks that of the Great Depression.
Moreover, the collapse in world trade in one year since April 2008 is actually as great as that which occurred over two years from June 1929: "Globally we are tracking or doing even worse than the Great Depression... This is a Depression-sized event."
The decline, mirrored by a corresponding collapse in share values on the stock markets, continued for three years into 1932. During that time there were rallies in the stock markets, even record ones, but the trend continued inexorably downwards.
The authors conclude, however, that the lessons learned from that crisis, manifested in the stimulus packages that have been put into place, will mean that the worst effects of the Great Depression can be avoided today. This will depend on how soon global demand picks up, in other words, how quickly investment and consumer spending recovers, which in turn will depend on how quickly public and private debts can be paid back in order for spending to recover.
However, debt is likely to weigh the economy down for a long period and the problems in the banking system have not been resolved, particularly the flow of credit. The European Central Bank (ECB) estimates that eurozone banks will have to write down assets of $283 billion by the end of 2010 (on top of $365 billion already written down).
This isn't just from the toxic debt exemplified by the subprime crisis but from ordinary 'prime' loans that are being defaulted on due to the recession. They will require a fresh injection of $240 billion in capital; in these circumstances credit availability will be very tight. The International Monetary Fund (IMF) is even more pessimistic than the ECB - it estimates that eurozone writedowns will total $900 billion.
The measures of the main capitalist economies: maintaining historically low interest rates, pumping money into the economy and 'quantitative easing' (increasing the supply of money), have had some effect in slowing the severity of the downturn but have not stopped it. And the more governments borrow in order to stave off the worst of the recession now, the greater will be the scale of public spending cuts and tax increases to pay for it in the future. This will not only affect the pace and extent of a recovery but the scale of borrowing itself may even threaten further financial meltdown.
If governments cut back borrowing and public spending too soon then the recovery will also be affected. This happened in the 1930s, the stimulus packages were withdrawn too soon and there was a relapse into recession. It also happened in Japan in the 1990s.
The other danger is that the stimulus packages continue and the scale of government debt undermines investors' confidence in the economy and threatens the stability of the currency.
The extent of public spending cuts imposed by the IMF in Latvia, and the present cuts in Ireland and the Czech Republic may be a harbinger of things to come in Britain. Gordon Brown and David Cameron are already proposing massive cuts in public spending. The Tories say Labour's spending plans, which they are proposing to stick to, mean cuts of 10%, whereas Brown will only admit to 5%. But these figures are based on the most optimistic forecasts for economic recovery and are likely to be much worse.
Even if the economy avoids a collapse as severe as the one that occurred in Iceland, the scale of these proposed cuts will have a dampening effect on consumer spending and the consequent strength of recovery when it comes.
Moreover, some of the conditions which are now cited as evidence for growth will have an adverse effect; the stronger pound will affect the competitiveness of exports, rising oil prices will affect production costs. Gordon Brown, the former advocate of the 'light touch', has already called for controls on oil prices.
The super-rich, such as Larry Fink, are still rolling in money. The bosses are using this recession to maintain their neoliberal policies of driving down wages and exporting jobs to low wage countries. The closure of the Visteon factories in Enfield, Basildon and Belfast was a direct result of this process. Willie Walsh, the notorious head of British Airways, is asking all staff to work for a month for nothing, pledging that he will do the same - except that the annual wage of a member of the cabin crew amounts to less than half his monthly wage.
Rather than the recession nearing its end, the prospect is of a short blip of recovery before another downturn or prolonged stagnation. A plunge into a prolonged, 1930s style depression if the stimulus packages don't work sufficiently, can't be ruled out.
The only certainty is that workers will continue to be expected to pay the economic and social costs of this crisis, which makes the formation of a new workers' party, an independent voice for workers, increasingly urgent. However the credibility of a new formation will be swiftly undermined if it is unable to put forward a genuine socialist alternative that can chart a path for the working class out of the impasse of this capitalist crisis.
In The Socialist 23 June 2009:
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