In fact, the last IMF forecast for 2019 global GDP growth is 3.2%, rising to 3.5% in 2020. Its certainly not a “slump”, long depression, secular stagnation, or even a recession, as some predicted, though they have normally predicted such events for every year since 2008, and, for some, before that, but nor is it anywhere near 5%. The biggest drag on global GDP growth has been the manufacturing sector, although that sector is increasingly only a minor contributor to GDP overall. In advanced economies, service industry accounts for around 80% of GDP, with manufacturing at less than 20%, but in industrialising economies like China, too, service industry, now, also constitutes the major part of new value and surplus value production, and is the fastest growing sector.
The reason that GDP did not head towards 5% as I expected is quite simple - Trump's trade war, Brexit and increasing economic nationalism and protectionism. In my predictions for the previous year, I had predicted growth of 4%, which came in close at 3.7%. However, I pointed out, in my prediction for this year, that the reason that it had fallen short by this small amount, in 2018, was the effect of Trump's trade war, and Brexit. Consequently, I added the rider that similarly, the prediction for 2019 was speculative, because it was unknown what would happen with either of those two factors. We now know. Rather than Trump's trade war coming to an end, he ramped it up much further, causing retaliation from China, and from the EU. The effect was to slow US growth, and Chinese growth. The slowdown of Chinese growth hit Germany, as a major exporter of manufactured goods to China. A slowdown of Germany, as the EU's biggest economy, had an obvious impact on growth for the whole of the EU itself.
But, EU growth was also hit by two other factors. Firstly, Trump's trade war itself extended to the EU, with his imposition of protective tariffs of 25% on steel and aluminium, and further restrictions on cars and other products. A WTO ruling in favour of the US in relation to Airbus also saw the US impose further tariffs on a range of EU products in retaliation, before a WTO ruling, in a similar vein, against Boeing was made. The WTO is likely to rule that Boeing, which depends hugely on support from the US state, was even more flagrantly in breach of WTO rules. Given that Trump has rushed to impose punitive tariffs on EU products, its likely that the EU will act in the same way. The overall result is to reduce global trade, to raise costs of production, and to slow capital accumulation and economic growth.
The second factor affecting the EU was, of course, Brexit. Until the actual relation between Britain and the EU is established, it makes it difficult for firms in the EU to make long term investment decisions. If Brexit were to be cancelled, then capital invested in Britain might remain, and other plans for investment might go ahead. Some kind of BRINO would have a similar result. But, if anyone takes Boris Johnson's words about seeking some kind of increasing divergence seriously, then its inevitable that firms will relocate out of Britain and into the EU, so as to avoid the additional costs and frictions that will arise from such divergence and the erection of borders. Some firms have already decided not to wait, and have relocated out of Britain into the EU, but the time taken to establish these new businesses, means that, until they actually begin to produce goods and services, they are a net detractor from the economy.
There are signs that Trump and China are about to reach a deal. There are two factors impacting on Trump. On the one hand, his line of economic nationalism has played well with the reactionary elements of his base. But, economically, it has been disastrous. The tariffs on steel and aluminium have seriously raised the costs of production of US manufacturers, and thereby resulted in a tie-up of capital, and reduction in the rate of profit. Tariffs on imported consumer goods have raised the cost of living for US workers. But, the retaliation of China for Trump's tariffs was targeted to hit Trump's base. China massively reduced its imports of US agricultural products such as soya beans. US farmers in those mid-western areas where Trump's base is strongest have been hit very hard. In order to shore up his base, Trump has diverted billions of dollars in aid from the Federal Budget to support the farmers. That is money that could have been used productively to rebuild the US's crumbling infrastructure, and thereby raise US productivity levels. But, it also does not resolve the problems of the farmers. It provides them with an income, so that they don't starve, but it does not provide them with a market for their products for the coming year, unless the government is going to buy up their output. It means there is no basis for them to invest in production, and that has a knock on effect to all of their suppliers.
Trump's economic nationalist agenda in other areas has also been a similarly predictable failure. He promised his base amongst the rust belt that he would restore their industries in coal mining and steel production. He hasn't. The EIA expects 2019 US coal production to be 8% less than 2018, and 2020 production to be down by a further 14%. US steel production has also declined, reversing a rising trend from around 2015. The reality is that US coal production is set to decline despite Trump's endeavours for the simple reason that other forms of energy are now cheaper, cleaner and more effective. The availability of shale oil and gas has been a major factor, in replacing coal, but also of reducing US carbon emissions, because gas, in particular, produces less emissions per unit of energy produced. But, the US is also developing a range of cheap alternative energy solutions, again despite Trump.
More US workers now work in alternative energy production than in fossil fuel production, and the gap is widening. Moreover, the alternative energy jobs tend to be higher skilled and higher wage jobs than those in the old industries. This is a fundamental factor that explains the rise of Trump, and of Brexit, and this bifurcation will sharpen. The workers in the old declining industries are themselves old. They are workers that were given only adequate levels of education for the kinds of unskilled and semi skilled jobs they were going to be taking up. They are unlikely to be able to be re-educated or retrained to take on the kinds of jobs required by the growing sectors of the economy, in high value service production, or high value skilled technology jobs in alternative energy production. Those jobs will be undertaken by the young better educated workers. These are the workers who, in Britain, backed Corbyn and opposed Brexit, whereas those that backed Trump or Johnson, and Brexit, are those old workers, who yearn for a past to return that is now lost to them.
On the one hand, therefore, Trump has to choose, as he enters this year's election, whether to persist with his disastrously failing policy of economic nationalism and protectionism, in order to proclaim that he has stuck to his promises, or whether he has to do a trade deal with China, so as to ensure that the economy does not sink into recession.
The underlying premise that, in the context of an overall long wave upswing, measures of protectionism and economic nationalism act to reduce growth, and to divert it into alternative channels, rather than to cause an actual slump, remains in place. The fact of slower growth due to those protectionist measures also explains why interest rates did not rise, and so asset prices reversed their declines from 2018, aided and abetted by a resumption of measures of QE. This poses considerable threats to the global financial system once more. As Moneyweek said recently the big risk for 2020 is if everything goes right. If Trump's trade war ends, if Brexit is resolved, so that trade increases, and investment picks up, in a climate in which employment is already at high levels, with wages rising, it is inevitable that this will cause interest rates to rise. Capacity constraints are likely to cause other costs to rise. Rising inflation will create a further requirement for interest rates to rise, with a consequent impact of crashing asset prices. There is a lot today that is identical to the situation in 2007/8.
We have already seen overnight lending rates spike much higher due to liquidity issues. There is talk now that a liquidity crisis might erupt at the end of the year, which will require that a whole host of more liquid assets have to be sold to raise cash. That is a similar situation to that I described in 2008, in predicting the outbreak of the global financial meltdown that occurred a few weeks later. We have banks now, in a number countries, actually offering mortgages on negative rates of interest, and similarly charging their customers to put money on deposit with them. We have $15 trillion of government debt that has negative yields. If you want to understand why that is look at what happened recently with the issuance of Austrian government debt. The Austrian government issued a 100 year bond in 2017 with a 2% yield. The coupon, the amount of interest paid on such bonds is fixed, for example, the coupon on a £100 bond with a 2% yield is £2 p.a. The yield, therefore, moves up and down with the price of the bond, falling when the bond price rises, and vice versa. Now you might wonder who would be prepared to risk their money for up to 100 years into the future, for just 2%. The answer is plenty of people. Since the issuance of the bond, it has made a capital gain of 60%. This explains why speculators are not concerned about low levels of yields on assets, or even negative yields, because their eye is on the much larger capital gains that can be made from the perpetual rise in asset prices underpinned by the policies of QE implemented by central banks.
In fact, a condition for faster economic growth is that these asset price bubbles are burst so that potential money capital stops being used for speculation in these assets, and instead starts to be used to accumulate additional productive-capital.
No comments:
Post a Comment