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From The Socialist newspaper, 3 February 2016

World economy heading into a storm

Lynn Walsh

Every year the global capitalist elite meet at the World Economic Forum held at Davos, a posh Swiss ski resort. This year, the prevailing mood was anxiety, the keynote pessimism. They fear the world economy is heading for a storm. In fact, world capitalism is already being buffeted by very choppy waters.

There has only been a slow, feeble 'recovery' from the 2007-10 slump. Growth has been sluggish, with the partial exception of the US.

World economic growth (real GDP) averaged 4% a year during 2003-12, a period including boom and the 2007-10 slump. During 2013-15, supposedly a 'recovery', global growth averaged only 3.1%. The developed OECD economies averaged 1.7% growth in 2003-13 and 1.7% during 2013-55, hardly a dramatic recovery.

Europe and Japan are stagnant. Quantitative Easing (QE), the creation of cheap credit by central banks, has failed to revive the production of goods and services. Austerity policies, with drastic cutting of state expenditure, have held back the recovery and resulted in chronic mass unemployment. Yet QE produced new bubbles in property, and stocks and shares.

Cheap credit did stimulate massive investment from the West into developing countries, so-called 'emerging markets', inflating a series of bubbles in property, commodities, and financial assets. This was one of the major sources of global growth in the last few years.

But the sharp slowdown of China and the slump in oil prices have changed all that. There is a massive outflow of capital from semi-developed countries, including China. Their exports have slumped. Russia, Brazil, and a whole array of commodity-exporting countries now face economic slump and social upheaval. The emerging markets have become submerging markets, sinking like punctured dinghies.

China was for years the main locomotive of world growth. Real GDP grew by an average of 10.5% a year during 2003-12. This has now dropped to 6.8% in 2015, and even this is widely believed to be exaggerated. Now the slowdown and fears of a catastrophic derailment are a source of crisis.

These trends have been reflected in the financial sector, with the recent see-sawing of global stock exchanges. At Davos the leaders lamented these trends but it was clear that none of them have any idea of how to avoid a new crisis.

Oil

In the past cheap oil has usually been a bonus for capitalism. Today it is one of the causes of the crisis.

Major oil producing countries, like Russia, Nigeria and Saudi Arabia, became dependent on huge oil revenues. The slump in oil prices from over $100 a barrel last year to $30 a barrel this year has hit their budgets, including state subsidies for food, welfare and education.

There has also been a slump in commodity prices, especially minerals. This has slashed export earnings for countries like Brazil. The OPEC producers have so far refused to cut output to reduce the glut and push up prices. They are using cheap oil as a weapon to force high-cost producers (like shale oil producers in the US) out of business.

Major oil companies are now cutting back their investment in prospecting and development. Tens of thousands of oil workers have been laid off.

Many oil prospecting companies have borrowed heavily to finance exploration and the development of new fields, giving rise to a mountain of bad debts.

Emerging markets

The semi-developed countries, known as 'emerging markets', have been the hardest hit by the recent turmoil.

Many of these economies are primarily commodity exporters. The slump in demand, mainly because of the slowdown in China, has had a devastating effect.

After the 2007-10 slump the emerging markets, together with China, were the main source of world growth. Speculative capital from the advanced countries poured in, giving rise to a series of bubbles.

In recent months, this has been reversed sharply. Speculative capital is now flowing back to the advanced capitalist countries, especially to the US, which is seen as a 'safe haven' for financial and property assets. Most of these semi-developed countries in Africa, Asia and Latin America are now plunging into crisis.

The anxieties of the Davos elite have been focused on the slump in the price of oil and the slowdown in China. They fear a slowdown could become a long downturn.

Between 2003 and 2012 China's real (inflation-adjusted) GDP averaged 10.5% a year. In 2015 GDP growth fell to 6.8%, and even this is believed to be an over-estimate.

Previously, China imported vast quantities of raw materials and machinery. This has dropped sharply and the regime has attempted to switch to domestic consumption and away from debt-financed, export-led growth.

Soft landing?

But the boom years have left a legacy - a huge property bubble, a financial bubble and a mountain of debts. Many manufacturing companies now face bankruptcies, and the banks that provided credit are overloaded with bad debts.

The Chinese leaders claim they are moving towards more balanced growth, reducing the role of debt-financed investment in infrastructure, industry and property, and boosting domestic consumption through raising wages and improving social benefits.

The regime still has huge resources to bail out struggling banks and floundering companies, and to subsidise living standards. But can it manage a soft landing for the economy? It is far from certain. The economy could slide out of control and into a deep downturn.

The huge number of strikes and protests taking place show the potential for explosive movements of the working class, poor labourers and peasants.

Every economic crisis is different. The 2007-10 slump (often called 'the Great Recession') started in the finance sector. The huge financial bubble associated with the property market in the US and elsewhere burst, triggering the collapse of a series of major banks and finance houses.

The financial collapse provoked a major downturn in global production, trade and consumer spending. It has still not fully recovered from that crisis. This time, the crisis is beginning in the 'real' economy, with a slowdown in investment, production and trade.

Big corporations are hoarding cash and financial assets rather than investing in new products and services. They are estimated to have $7 trillion reserves in cash according to Min Zhu deputy managing director of the IMF. Doesn't this reflect a profound lack of confidence in the prospects for capitalism?

Capitalist leaders have pursued contradictory, self-defeating policies. They have imposed savage austerity, cutting government expenditure, which has strangled growth.

High unemployment globally and weak growth of wages has led to demand from the private sector being depressed. Yet they have implemented a series of QE programmes under which central banks pump cheap credit into the economy.

This is 'welfare' for bankers. Rather than stimulate growth of the real economy, QE allowed speculators to create bubbles in property and financial markets (stock exchange, etc).

If the downturn continues as is most likely, it will trigger a crisis in the finance sector. The gyrations on world stock exchanges in the last few weeks are a foretaste of what is to come.

Conclusion

At Davos, the global elite also reflected gloomily on a series of geopolitical issues: a migrant crisis which threatens the cohesion of the European Union; war in the Middle East and its terrorist repercussions internationally; heightened tension between the western powers and Russia (with conflict over Ukraine); the Ebola pandemic, and now the Zika virus in Latin America.

What can be predicted is that the capitalist class will strive to offload the cost of crisis on the working class and sections of the middle class. Today's protests will become mighty mass struggle tomorrow - a struggle for a change in the system.

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In The Socialist 3 February 2016:


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