|SocialismToday Socialist Party magazine|
The global economy’s downward spiral
IN LESS than two months from mid-September, the financial crisis developed into a full-blown, global economic crisis. The US, EU and Japan are simultaneously in recession, for the first time since the second world war. The IMF predicts an economic contraction of 0.3% for the advanced capitalist countries in 2009. What seemed relevant only some months ago for the financial crisis – stock markets, interest rates and money supply – have been sidelined by hard facts regarding jobs, emerging markets (poorer countries) and the rising need for Keynesian-style state interventions.
The depth of the crisis is underlined by the extreme measures taken by governments. Preachers of privatisation have suddenly become evangels of massive state intervention, including state ownership of banks and companies. Theories and ideologies are put to one side. If nothing is done, the recession will lead to "xenophobia, nationalism and revolution", writes Martin Wolf, the Financial Times commentator.
This ‘autumn of summits’, however, has produced neither a real explanation for the crisis nor a global programme to solve it. The politicians cannot attack the real reasons for the sharp downturn: the built-in crisis of the profit-run capitalist system they are striving to save.
The Group of 20 summit in Washington in mid-November was unique because it admitted the need for a global solution, including governments outside the top G7. But, apart from general resolutions defending global trade and the need for ‘strengthened’ supervision of the finance sector, the only concrete agreement was to have another summit in London in April. Waiting for Barack Obama to enter the White House was also a factor.
The crisis started in the most global of ‘industries’, the finance sector, and is far from over. The Bank of England estimates global bank losses so far at $2,800 billion. By early November, 150,000 finance jobs had been cut globally. On 17 November, Citibank declared it would axe another 52,000 jobs.
Thousands of billions of dollars in different rescue packages have stopped the immediate threat of a collapse of the global financial system, but have not overcome the credit crunch. Cuts in central banks’ interest rates have not cut the costs of borrowing, since banks have tightened lending even further.
At the same time, the financial crisis shed its skin, growing into an economic crisis for world capitalism. The extreme inequality of wealth and resource distribution means that poor people will lose more from the downturn. Jobs and living standards are threatened for hundreds of millions, as are the economies of entire states. The World Bank has produced a shortlist of 28 countries, 13 of them in Africa, which are especially vulnerable to the triple threat of food and fuel price hikes, and financial turmoil. According to Oxfam, 200 million people have dropped below the poverty line this year.
All emerging markets have been hit, dependent as they are on exports and capital inflows for investments. A number of currencies have been de facto devalued, increasing prices and cutting demand. The flow of capital to the top 30 emerging markets will drop from $900 billon in 2007 to $560 billion next year, according to the World Bank.
The prognosis for the US economy is being rapidly revised down. Goldman Sachs predicts minus 3.5% for the US economy in the fourth quarter of 2008 and another minus 2% in the first quarter of 2009. Another US bank, JP Morgan Chase, predicts that the world economy will shrink by 1% in the last quarter of 2008 and the first of 2009. For the whole of 2009, it predicts a global growth of only 0.4%. If borne out, this mean a social and economic disaster. Population growth alone demands global growth of 3% to keep per capita GDP constant.
The slump in the US has a direct effect on exporting countries. In South Korea, the government has launched austerity measures and is appealing to people to buy Korean. In China, growth is falling sharply. Half of all toy and shoe factories have gone bankrupt, axing hundreds of thousands of jobs. This is being aggravated by the construction and property collapse. With a fall in commodity prices, oil-producing countries like Russia are among those most affected.
The 15-country eurozone is in recession – defined as a shrinking economy for two consecutive quarters. The EU commission presented two scenarios: 0.1% growth or minus 1%. The OECD predicts a negative growth of 0.5% in the eurozone next year. In Germany, GDP fell by 0.5% in the third quarter. The economies of Spain and Ireland are shrinking. Italy and France most likely also have negative growth. Outside the eurozone, the commission believes the British economy will contract by 1% – particularly vulnerable because of high consumer debt and dependence on the finance sector.
The worst crisis in Europe, however, is developing in Eastern and Central Europe. In mid-November, Ukraine got a $16.5 billion loan from the IMF, on condition it cuts public-sector expenditure. This loan is only a quarter of what is needed to pay off short-term debt. In Hungary cuts, increased interest rates, and a loan from the European Central Bank have not stemmed a continued drop in the currency, the forint. Hungary’s banks are foreign-owned and many loans are in euros, making a devaluation of the forint more severe for companies and households. The IMF, EU and World Bank have now given another loan, $25.1 billion, demanding a reduction in the state deficit, which is 9% of GDP. The Hungarian government has promised cuts in wages and pensions.
The crisis in the Baltic states is also becoming more acute by the day. Next year, Latvia’s debt to foreign lenders will be four times its estimated income from abroad. For Estonia and Lithuania, the figure is 3.5 and 2.5 times respectively. Today’s extreme austerity policies will become worse.
In the US, consumption (accounting for 70% of GDP) fell by 3.1% in the third quarter of 2008. Retail sales fell 2.8% in October, the fastest drop since the index started in 1992. General Motors declared October the worst month for over 60 years (minus 45%). Unemployment rose from 4.8% to 6.2% in the year to September.
World trade is slowing. The IMF has cut its world trade prognosis from 4% growth for next year to only 2%. The Baltic Dry Index, a leading cargo shipping, has dropped 86% in value since its peak in May. Global trade could even contract next year, for the first time since 1982, according to World Bank boss, Robert Zoellick. Chinese Baosteel, the world’s biggest producer, will cut production by 10% in the fourth quarter.
A global investment crisis is developing out of the drop in demand and the reduced flow of credit. Investments in the US fell by 1% in the third quarter and, in the housing sector, by 19%. After the latest interest rate cuts, central banks have very little room left. The US Federal Reserve rate is at 1%, while the Bank of Japan is down to 0.3%. The collapse on stock exchanges, 45-50% according to global indexes, will now affect the huge hedge funds. Morningstar’s hedge fund index fell 7.9% in September, 9.4% in October. Many speculators now want to sell or pull out.
The political effects of the crisis are only just beginning. Many politicians have raised their nationalistic tone but, so far, have been forced to attempt common measures with other governments. We will see further unconventional efforts to save the capitalist system – as in the 1930s. To save the banks, packages have been presented by the US ($700bn), Germany ($645bn), Britain ($590bn), France, Russia, etc. In the top ten are also Sweden and Austria, with big bank ownership in Eastern Europe, alongside Germany.
In fiscal support – now strongly advocated by the big banks and by the IMF – the US, Japan and most European states have launched other packages. For the car industry, the US has promised $25 billion in credits and the EU €40 billion. However, there must be some limit to such measures, which will result in huge state deficits. The US fiscal deficit may rise to over $1,000 billon next year.
Among workers and youth, there is a certain shock reaction to the crisis, but also rising anger against the thousands of billions going to the bankers, while welfare is under attack and nothing is done to save jobs. This will prepare the way for the only real alternative, and way out of the crisis: democratic socialism on a world scale.
Per Åke Westerlund
Rättvisepartiet Socialisterna (CWI Sweden)