Global growth heads towards 5%.
Last year, I predicted global growth would be around 4%, which would reflect the fact that it would have a relative slow down due to the three year cycle, running from Q3 2017, to end of Q3 2018. In fact, it turned out around 3.7%. The undershoot can be attributed to the effect of Trump's trade war, and the effect of Brexit on the UK and EU economies. The three year cycle goes back at least thirty years, and as I've described before, is probably due to the upgrade cycle for technologies.
In Theories of Surplus Value Chapter 9, Marx, in analysing the long wave cycle of agricultural and mineral prices, sets out how, at certain points, it becomes necessary to establish new areas of land and mineral cultivation. These require extensive amounts of fixed capital expenditure on infrastructure. It can take more than a decade, before all of this investment in infrastructure begins to affect market values. Marx here does not extend this analysis into an analysis of the long wave, which was left to later writers. But, in Capital II, Marx does describe the way the lifespan of other elements of fixed capital, of around ten years, determines the normal business cycle. The three year cycle, operates in a similar manner.
We should now see, therefore, a relative rise in global growth, as the underlying effect of the long wave uptrend asserts itself. The prediction is, however, somewhat speculative, because we still do not know what the effects of Trump's continuing global trade war, and Brexit will be. One thing we have seen, during the year, is that despite US stock markets suffering a 20% decline from their peaks, that has not adversely affected the real economy, thereby confirming Marx's point that financial crises do not necessarily affect the real economy, as they only reflect paper wealth being transferred from the hands of one group of speculators into those of another.
As I wrote reviewing last year's predictions, in a period of long wave crisis or stagnation, Trump's Trade War, and the general impediments to trade, represented by Brexit, would have the effect of bringing about an actual reduction in trade and growth. Today, in a period of upswing, they merely reorder the existing trade, pushing it, and production into different channels, with only a relative impact on the absolute levels. If, some deal is reached between Trump and China, with a subsequent removal of tariffs, we will see a strong impetus to trade, and a consequent effect on growth. The same is true if Brexit is stopped. But, we should remember that although they are the three biggest economies in the world, the EU, US and China are not the whole of world trade and production. Moreover, although Trump may be trying to isolate the US from the global economy that still leaves the EU and China a lot of scope to increase their own trade, and their trade with the rest of the world's economies.
Trump's imposition of steel tariffs on Chinese and EU steel, is met by retaliatory tariffs. The steel that would have gone to the US eventually gets redirected to the domestic market or other export markets, and so on. It results in higher costs, and lower productivity with a consequent impact on inflation, interest rates and growth, and that extends to all goods impacted by tariffs.
Britain is hit particularly hard by these trends, because of Brexit, and because of its low productivity economy that remains highly dependent on trade, and on imports. If Brexit goes ahead, a lot of UK production will shift to the EU.
Associated with the cycles described above, there is the credit and financial market cycles. I have set out previously the existence of a 12-13 year cycle of stock market crashes. It can be seen in 2000, 1987, 1974, 1962, clearly. These cycles are related to conjunctures in the long wave, as a result of changes in profits, and in interest rates. Although there is evidence of a short term cycle of stock market movements over a seven year cycle, such as the 1994 crash that resulted from an attempt to raise official interest rates, I suspect that the 2008 crisis was more a result of the fact that, after 2000, a huge amount of liquidity was pumped into financial markets to reflate asset prices, and to force official rates down, for that purpose. The effect was to push asset prices to unsustainable levels, at the same time as artificially pushing official interest rates, and yields on government bonds down, so that even the slightest rise in rates, represented a large proportional increase, with a consequent effect on the capitalised values of revenue producing assets. That has been driven to even more ridiculous levels after the 2008 crash.
I expect that, as global growth continues to rise, in 2019, the impact will again make itself felt on interest rates, and a consequent continued pressure on asset prices. The current, continued slide, particularly in US asset prices, exacerbated by the maverick behaviour of Trump, is likely to deepen, and spread to other asset markets across the globe, especially as the ECB begins to tighten its stance, and withdraw from QE. The path followed in the 1960's might provide a pattern. In the mid 1960's, through to the early 1980's, the Dow Jones fell in inflation adjusted terms, as interest rates rose through the period. We are likely to see some large drops in stock, bond and property markets, followed by partial recoveries, but with the major longer term effect, being a similar fall in inflation adjusted prices, as even during periods of asset price recovery, they fail to rise as fast as inflation, reversing the situation seen over the last 35 years.
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