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The talk of possible recession has been in
the air internationally for some time now. And of course, after the
September 11 attacks on New York and Washington, the US Government, the
IMF and others were quick to seize on this as the excuse for predicting a
future downturn, which could then be claimed as the adverse fallout of
international terrorism.
The truth is of course, that the weakness
in the international economy was already well advanced for some time
before September 2001. In fact, much of the world economy had actually
been experiencing a slowdown or recession for several years before the
last quarter of 2001.
In fact, the most striking feature of
international economic trends during the 1990s was that the US experienced
strong growth while most of the other economies in the world system
languished. This was essentially because confidence in the US dollar had
made American capital markets a haven for the financial investors. This
fed a consumption-led boom within the US, and also caused growing current
balance of payments deficits for the US economy. The current account
deficit of the US reached the record level of $ 450 billion by the end of
2001.
These
trends made the latter half of the 1990s unique in the history of post-war
capitalism or another reason. In the past the country holding the
international reserve currency did not face any national budget constraint
because it could print money and spend it across the world, since everyone
was willing to accept and hold such money. As a result, the government of
that country routinely resorted to deficit spending to keep the world
economy moving. That is, the US economy played the role of locomotive of
world growth by sustaining deficit-financed spending.
According to one estimate (published by
Morgan Stanley) the growth in US gross domestic product was responsible
for about 40 percent of the cumulative increase in world GDP in the five
years ending in mid-2000, which is twice America’s share of the global
economy. In this period, demand growth in the US was 4.9 per cent per
annum compared to 1.8 per cent in the rest of the world. In other words,
US economic expansion pulled the rest of the world behind it, at least to
some extent.
That process ended some time in late 2000.
And with the US engine of growth slowing down, it meant that other
countries - which had been relying on the huge demand for their exports
from the US to keep their own growth rates positive - were adversely
affected. This has been immediately evident in terms of world trade. WTO
figures suggest that the growth of world trade in volume terms, which was
more than 12 per cent in 2000, was only around 2 per cent in 2001. And
when this is combined with continued deflation in terms of trading prices
in world markets for primary commodities and many manufactured goods,
world trade in value terms was stagnant.
Patterns of output growth
and prices in the major economies
The growth patterns in the major developed industrial
countries are crucial indicators of the overall pattern
of the international economy. Chart 1 provides
the IMF’s latest estimates and projections of growth
of real GDP. It should be noted that these estimates,
published in December 2001, are already significantly
lower than those published by the IMF just three months
earlier. While the IMF has attributed the decline to
the September terrorist attacks, it could be argued
that the earlier estimates were anyway to optimistic,
as many had suggested at the time.
Chart
1 >>
Click to Enlarge
Thus the United States economy, which had led in terms
of growth rates of more than 4 per cent per annum until
2000, fell to only 1 per cent growth of real GDP in
2001. In fact, other sources suggest even lower growth
figures for the US for the past year. Industrial
output in particular has been falling for more than
a year.
Further, this period of slowing growth has been accompanied
by decelerating and now even declining price levels,
raising a real threat of deflation for the first time
since the Great Depression. Chart 2 gives the IMF estimates
of changes in consumer prices, which suggest that inflation
slowed down sharply and there was deflation in Japan.
But other sources point to stronger tendencies towards
deflation even in the US economy. Figures from the US
Labour Department indicate that while wholesale prices
rose by 0.1 per cent in January 2002, they had fallen
a cumulative 2.6 per cent in the year to January, which
was in fact the biggest 12-month drop in half a century.
Chart
2 >>
Click to Enlarge
Similarly, the data on industrial capacity, (only 75
per cent in January 2002) a quarter of which went unused
in January have been argued to reflect strong productivity
growth, but they also raise concerns about the risk
of deflation - a vicious cycle of falling prices, profits,
production and employment. Business investment in the
US fell by nearly 13 per cent in the last quarter of
2001 compared to the previous year, making it the fourth
consecutive quarter of falling investment.
The European Union was supposed to be recovering from
2000, but the past year’s growth performance was once
again lower, suggesting that the earlier growth impetus,
such as it was, was not sufficient to raise the dynamism
in the European economy. Both the IMF and the OECD estimates
suggest a further deterioration in aggregate growth
performance of the European Union in the coming year.
The Japanese economy is currently in the weakest position
of all the major capitalist economies. Clearly this
economy is in the grip of a classic deflation, with
low output, falling prices and poor expectations leading
to declining levels of investment. The Japanese government’s
own forecasts show that the economy will not grow at
all in the fiscal year starting in April, with unemployment
continuing to rise, to nearly 6 per cent.
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