posted August 26, 2014
On the Edge of Another Global Recession?

The economic question of the day has suddenly become: ‘Is the global economy about to slide into another recession?’

The Eurozone’s 3rd Recession?

Last week, initial government released data for the 2nd Quarter 2014 showed the Eurozone economy coming to a complete halt. Germany’s economy—which represents a third of the Eurozone’s total GDP—declined by 0.2%, the first such contraction since 2012. So did Italy’s, while France recorded no growth at all for a second consecutive quarter.

The zero growth for the combined 17 Eurozone economies follows a near stagnation 0.2% growth in January-March. The January-June trend therefore strongly suggests a recession is now emerging in the core European economies—the third such in the past five years.

Europe’s first recession occurred in 2008-09 as it collapsed with the rest of the global economy. It then experienced a historically weak 0.5% economic recovery in 2009-10, only to fall back into another second recession in the subsequent 18 months that wiped out the prior meager 0.5% gains. 2013-14 thereafter saw an even weaker recovery of only 0.2%, and for an even shorter period, which is now being reversed once again.

The Eurozone arguably has never really recovered from the recession of 2008-09. The short, shallow recoveries of 0.5% and 0.2%, which have become progressively shorter and weaker, do not represent a true recovery. Europe has simply been “bouncing along the bottom” economically now for five years—stagnant at best and slipping in and out of recession.

An important new trend in the Eurozone’s now emerging 3rd recession is that the economic contraction is driven by the Eurozone’s key economic engines—Germany, France, and Italy—and not just its weaker economies on its southern and eastern periphery, as was the case in Europe’s second recession of 2010-12.
Together the three economies—Germany, France, Japan—represent approximately $8.8 trillion in GDP terms. That’s at least the size of China’s economy and much bigger than Japan’s. The three core economies of the Eurozone are thus key to growth and recovery of the global economy in general, as well as to emerging markets in particular since 56% of Germany’s nearly $4 trillion economy is derived from exports. So go German exports, goes Germany; and so goes Germany, goes the Eurozone and, in turn, many of its emerging market trading partners. And Germany’s export driven economy is facing significant further headwinds in the near term.

The USA engineered coup in the Ukraine earlier this past February, and the subsequent USA driven sanctions on Russia ever since, have already begun to have a significant additional impact on Germany’s exports, as well as other Eurozone and EU economies like Italy, Finland, Austria, and East Europe.
With little to lose economically itself from imposing more severe sanctions on Russia, in contrast the Eurozone and EU economies which have much to lose, the USA has continued to push hard for more Russia sanctions from Europe, the effects of which are now beginning to take a toll on the already weak Eurozone economy. The impact of those sanctions on the Eurozone, and Germany-Italy in particular, will no doubt continue to grow in the coming months, thus further ensuring that Europe slides into its 3rd recession.

The impact of sanctions on the Eurozone economy is measurable not just in terms of quantifiable goods (exports-imports) and money capital flows between Europe and Russia, but also in the more difficult to quantify psychological effects on investment as a result of the continuing crisis in the Ukraine and sanctions. Political crises have economic effects, even though difficult to trace directly to GDP and economic growth. But psychological forces in business and consumer confidence trends are a factor nonetheless, and are now also playing a role pushing the Eurozone into recession.

Apart from the trade and psychological effects of sanctions, demands on Europe in the near future to provide further bailouts for the Ukraine’s now collapsing economy will contribute still further to the recessionary slide of the big three Eurozone economies.

The Ukraine’s currency has fallen 60% in 2014 and much of the IMF and EU $18 billion deal last May has already been earmarked for $6 billion payments to Euro banks for previous bailouts. More of that $18 billion will be used by Ukraine’s central bank to finance exports and to offset its currency decline. Little therefore remains of the IMF’s initial $18 billion bailout package to stimulate Ukraine’s real economy. As this writer predicted last March, the Ukraine economy will contract 10-15% in 2014 and will need an eventual $50 billion in bailout funding from the west. But with the IMF not likely to provide a further bailout anytime soon, and the USA providing only token financial assistance, the Europeans will be faced with providing further Ukraine bailouts. The continuing Ukraine crisis and the burden of providing still more bailout will further depress economic sentiment in the Eurozone’s core economies.

In addition to the preceding negative forces, there’s the Eurozone’s own more fundamental problems which are deep and remain still unresolved: i.e. little or no improvement in the region’s record level of unemployment; the lack of real wage growth to stimulate consumption; private banks continuing to hoard money and not lend; and business investment and confidence drying up.

On the policy front the Eurozone still appears committed, nevertheless, to a monetary policy that has not only failed in Europe, but in the USA and Japan as well: i.e. still more liquidity injections by the European Central Bank (ECB) into the private banking system, accompanied by a policy of austerity on the fiscal side that has been modified only slightly less severe in recent years.

The ECB’s monetary policy to date has been to inject more than $1.5 trillion of liquidity into Euro banks, primarily by means of its LTRO program—a program in some ways similar to quantitative easing (QE) by central banks in the UK, USA, and Japan. This primary reliance on monetary policy as the road to recovery thus echoes the USA Federal Reserve, Bank of England, and Bank of Japan’s similar policies since 2009. All the central banks of the advanced economies (AEs) have introduced near zero interest rates, while implementing additional ‘quantitative easing’ (QE) direct central bank purchases of investors’ bad assets at subsidized prices.

But in all cases, none of the AE central bank monetary injections have had much positive effect on AE real economies. The banks have mostly hoarded the injections, not lent investment capital in any substantial amounts to businesses that would produce jobs, and instead have redirected the liquidity to financial speculation that has fed new financial asset bubbles worldwide. In other words, whether QE-LTRO or zero rates, the effect has been the same: financial asset inflation on the one hand, and, on the other, tepid or stagnant real growth, a drift toward deflation in real goods and services, little or no job creation, and repeated bouts of real economic stagnation and/or recessions .

More liquidity injections by the ECB in whatever form, including a Euro-QE, will therefore not halt the Eurozone’s slide toward its third recession, nor its steady drift toward price deflation in the real economy. At the same time, the real and psychological effects of sanctions and the Ukraine crisis, the problems in bank lending, weak job creation and wage growth, and flattening business and consumer confidence, will continue to deepen the Eurozone’s economic contraction and drift toward deflation in 2014.
But the Eurozone is not the only serious trouble spot emerging in the global economy today.

Japan’s 4th Recession?

Japan’s economic and policy trajectory since the economic crash of 2008-09 has been similar to the Eurozone’s, prompting commentaries in the global business press about the growing similarities between the European and Japanese economies in recent years. Both Europe and Japan have experienced repeated short and shallow recoveries since 2009, followed by similar repeated descents into recessions as well. With the latest bout of Eurozone decline, some commentators have begun to ask if Europe is succumbing to the “Japanese malaise” of repeated recessions and weak, halting recoveries.

But Japan’s economic performance since 2009 has been worse than even Europe’s and its second quarter 2014 collapse much worse than the Eurozone’s.

Like the Eurozone, data last week suggest Japan may have also entered another recession in the 2nd quarter 2014. Last week economic data revealed Japan’s roughly $6 trillion annual GDP contracted by a huge -6.8% in the 2nd quarter 2014. Should Japan also now slip into recession, it would represent its 4th such economic contraction since 2008. After collapsing by more than 15% in 2008-09, Japan experienced a second recession in 2010-11, followed by a third in 2012. 2014-15 may represent its fourth.

Like Europe, Japan has attempted to recover from its three prior recessions since 2008 by means of a massive money injection by its central bank, the Bank of Japan. In early 2013 its central bank began injecting $530 billion a year into its private banking system—a policy nearly identical to that followed by the US central bank, the Federal Reserve, which since 2009 has provided more than $4 trillion of QE and another $10 trillion in near zero rate loans to US banks and shadow banks. Also like the US Federal Reserve, Japan’s massive money injection has also been driven primarily by a direct bond buying QE program.

Today a year after introducing its version of QE, the economic effects have been no different from similar monetary policies followed by the European Central Bank’s $1.5 trillion LTRO and the US Federal Reserve’s $4 trillion QE: Japan’s QE has stimulated financial asset markets but has done little for the real economy. Japan’s real economy is about the same size today as it was a year ago, when the Bank of Japan’s money injection began to hit the economy. On the other hand, its QE led money injection has resulted in a nearly 100% rise in Japan’s stock markets and a consequent escalation of corporate profits and investor incomes—just as had US central bank policies since 2009 and just as will a Eurozone QE when it most likely comes later this year or in early 2015.

The massive money injection by Japan’s central bank has produced the same effect as the massive liquidity injections by the US, UK and ECB central banks: despite the central bank money, Japan’s private banks in 2013 continued to lend only to large Japanese transnational companies, mostly for investment offshore, and not to the general economy. As a result, Japan’s level of domestic investment, wages, and consumer spending have not recovered despite the Bank of Japan’s policy. In the 2nd quarter consumer spending fell off a cliff, declining by an unprecedented nearly 20%.

Japan’s longer term consumption slowdown can be traced—as a similar consumption slowdown can be in the USA and in Europe—to a continuing decline in Japanese workers’ real wages and earnings over the last decade. Japan workers’ wages have declined every year except one since 2004. And that decline has accelerated every year since 2010, falling 3% in 2013 and a projected more than 4% further fall for 2014.
While some argue Japan’s second quarter 2014 GDP decline of -6.8% was due to a 3% increase in sales taxes introduced in the quarter, Japan’s household consumption rates were already declining to nearly zero by end of year 2013. The April sales tax hike just pushed consumption spending over the cliff. A similar scenario has occurred with Japan’s domestic business investment, with business inventories actually contracting in 2013 despite the massive money injection.

Both the core economies of the Eurozone and Japan’s economy are therefore poised on the precipice of a potential major contraction. Together that’s $15 to $20 trillion of global GDP that may potentially contract even further than 2nd quarter data already indicate.

That kind of magnitude and contraction cannot but significantly impact the rest of the global economy in a serious way. Most affected will no doubt be other emerging markets, already slowing in many cases to less than 1% GDP growth rates, that are dependent on money capital flows from Europe and Japan and on exports sales to those economies. Nor will the other two major nodes of the global economy—China and the USA—remain unaffected.

China’s 3rd Stimulus & USA’s 3rd Relapse

Somewhat similar to Europe and Japan, the USA economy has experienced three less severe economic ‘relapses’ in the form of brief, single quarter GDP declines to zero or negative growth since the 2008-09 global economic collapse. These occurred in early 2011, late 2012 and a more recent significant -2.9% decline in the first quarter of 2014. Although declining less severely in GDP terms than Europe and Japan, the USA economy has also been ‘bouncing along the bottom’ like Europe and Japan. Its stagnation has been more muted, with growth rates around 1.8% a year, about half that of normal. This muted stagnation has been due to the USA’s privileged position in the global economy, due to its dominant currency, its massive military spending, and its central bank’s ability to influence money capital inflows from the rest of the world back to the USA when necessary.

China has experienced slowing rates of growth, from what was once double digits, that have stabilized around 7-7.5%. But that has been due to China’s massive fiscal stimulus of 15% of GDP in 2008-09 and because it has introduced two further rounds of fiscal stimulus in the past two years and is about to introduce yet a third in order to prevent a further decline in GDP. China has thus differed fundamentally from the AE capitalist economies in its fiscal policy, and its central bank monetary policies have ensured its significant money injection since 2009 has remained in China. However, since 2010 it has also been experiencing a growing problem with shadow banks and global speculators that have been slowly destabilizing its financial markets.

The global capitalist economy today has clearly entered a transitional stage. A further contraction in Europe and Japan, which is quite possible in months to come, may prove sufficient to drag a number of emerging economies with it. That in turn would slow growth in both the USA and China economies.
The consequent further ratcheting down of global growth would also raise the risk of creating a new round of global banking and financial instability, signs of which are also emerging today in the Eurozone, China, in select emerging economies, and elsewhere in global capital markets for stocks, junk bonds, leveraged loans, and other financial instruments. Should another financial instability event occur, it would take place on the base of an already much weaker real global economy compared to that of 2007-08. The consequences for the real global economy would prove even more serious than in 2008. But that’s another story, yet to be told.

Dr. Jack Rasmus
August 2014

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