BY EVA CHENG
Fears that an all-out world recession is about to hit have become increasingly pronounced, with Japan and the major European economies following the formerly booming United States into sharp deceleration.
In May, the International Monetary Fund (IMF) revised downwards forecasts it made eight months earlier for nearly all major economies — expecting, for example, world output to grow by 3.2% in 2001 rather than 4.2%, the United States to expand by 1.5% in 2001 instead of 3.2%, Japan by 0.6% instead of 1.8% and the 12-country euro zone by 2.4% instead of 3.4%.
These forecasts were a far cry from the US growth of 5% achieved in 2000, Japan's 1.7% and the euro area's 3.4%.
But even since those downward revisions, the outlook has turned increasingly grim.
On June 23, London's Economist, a ruling-class mouthpiece not known for radicalism, issued a confronting editorial, stating "The world economy is starting to look remarkably, even dangerously, vulnerable. America's growth seems to have fallen close to zero in the current quarter. Japan has almost certainly slipped into another recession. And although the euro area is still growing, its pace has slowed more sharply than expected."
Then on July 18, US Federal Reserve chairperson Alan Greenspan reinforced the gloom with a grim assessment of his own.
After cutting US official interest rates six times in six months, from 6.5% to 3.75%, Greenspan told the US Congress that day: "Our accelerated action [of unprecedentedly frequent and deep interest rate cuts] reflected the pronounced downshift in economic activity, which was accentuated by the especially prompt and synchronous adjustment of production by businesses."
"The uncertainties surrounding the current economic situation are considerable," he continued, "and, until we see more concrete evidence that the adjustments of inventories and capital spending are well along, the risks would seem to remain mostly tilted towards weakness of the economy."
In more than a hint of a looming global recession, Greenspan added, "weakness emerged more recently among our trading partners in Europe, Asia, and Latin America. The interaction of slowdowns in a number of countries simultaneously has magnified the softening each of the individual economies would have experienced on its own."
Two days before Greenspan, Japan's central bank also reported deep-seated concerns about its own economy.
In its latest Monthly Report of Recent Economic and Financial Developments, the bank said, "private consumption remains flat ... Housing investment is declining and public investment is also about to decrease since the implementation of the supplementary [rescue] budget for fiscal 2000 has peaked out. Net exports continue to decrease, reflecting not only a slowdown in overseas economies but also sluggish demand for IT [information technology]-related goods. Business fixed investment has started to decrease while exporting conditions continue to deteriorate."
"Industrial production continues to decline sharply," the report went on, "reflecting such developments in final demand and a further buildup of excess inventories of electronic parts and some materials. Corporate profits and business sentiment are also worsening particularly in manufacturing."
Japan is particularly vulnerable to adverse overseas developments because of its high export dependence, with 30% of its exports going to the US, 16.3% to the European Union and 40% to East Asia — all in varying degrees of trouble.
Moreover, 19% of Japan's exports are IT-related goods, 20% are automobiles and 30% are capital goods, all sectors with sales prospects. "Exports are expected to continue declining for some time", the report predicted.
Concerted gloom and doom
These institutions are rarely open about adverse developments in the key economies, being rather famous for putting a gloss on them — which makes their concerted predictions of gloom and doom all the more credible.
What most troubles the world's economic rulers is the synchronisation of economic woes.
Japan, the world's second largest economy, has been mired in recession throughout the 1990s. But there hasn't been much fear that its problems would spread — in fact, both the US and Europe have benefitted from the country's decline.
But it's different now that the US is in trouble. As the world's largest economy, the US accounts for 30% of world production, compared to 13.4% for Japan, 7.6% for Germany (the third largest), 8.7% for non-Japan Asia (which includes China's 3.4%), 7% for Latin America and 1.1% for Africa. The EU's 15 members together pool 29.5% of production.
Moreover, since the greenback became the anchor of the world's currencies in 1935, the US has enjoyed many important advantages: it's the anchor of the world financial system.
Because of this, the US can, for example, afford to run significant deficits in its international balance of payments (allowing it for years to import a lot more than it exports) with no serious consequences. Others with similar shortfalls would find their currencies under severe pressure to devalue.
The US current account shortfall, which now totals US$400 billion, or 4.5% of its gross domestic product, has contributed significantly to the US's status as the "biggest market in the world".
With the bulk of cross-border trade and debt transactions denominated in US dollars, the US plays a central role in setting world interest rates, thus determining not only the debt servicing costs but, indirectly, the borrowing ability and wellbeing of many economies.
All these, not to mention its supreme military might, have given the US powerful leverage to impose its will on other countries. This constitutes the basis for the saying: "When the US sneezes, the rest of the world catches cold".
Yet despite this supreme position, the US hasn't been able to free itself from the capitalist boom-bust cycle. In each of the nine worldwide downturns since 1945, the US managed to "recover" only by outcompeting its rivals and extracting greater value from Third World economies. The world's richest economy could only recover at the rest of the world's expense.
'Sluggish' recovery
Nevertheless, Business Week in 1997 termed the US's 1990s expansion — which averaged a GDP growth of 3.4% per year between 1993-98 — "the most sluggish" in modern times.
US growth was then shored up to 4.2% in 1999 and 5% in 2000, as it benefitted from the economic crises in Asia, Russia and parts of Latin America in 1997-98.
Asia first got into trouble when some of its newly industrialised countries failed to secure their places in oversaturated manufacturing markets. Structural deficits in their current accounts were fed by large external debts, thus increasing their vulnerability to attacks by speculative funds on their currencies and stock markets.
Besides benefitting from buying up cheap corporate assets in troubled countries' fire sales, the US was also on the receiving end of the sudden surge of credit which fled the troubled areas. Not including direct investments, net portfolio flows into the US zoomed to almost US$500 billion last year, compared to less than $25 billion in the early 1990s.
This new flood of "orphaned" capital helped take the US stock markets to new heights. The impressive potential of information technology and related innovations was seized upon, under the lead of Alan Greenspan and then US president Bill Clinton, and hyped as the "new economy".
This "dotcom mania" boosted the consumption power of US stockholders (the "wealth effect") and contributed to the surge to a breathtaking 8.3% growth in the last quarter of 1999.
More booms and busts
But this IT stock-led boom was still based on developments in the productive economy and, in a problem typical to each new round of capitalist crisis, the demand for IT goods couldn't hold up. The market became seriously oversaturated, prompting the April 2000 "tech wreck" and subsequent falls in US stock market indices.
As Greenspan has pointed out, the IT slump isn't a uniquely US affair but a global one. The problem of overcapacity hasn't been confined to the IT sector but is a general one, with global capacity utilisation hitting its lowest levels in 15 years.
Greenspan has claimed that overcapacity is a temporary phenomenon which will evaporate when "consumer confidence" revives, implying this will then boost investors' confidence to expand or renew their production.
But such a position is illfounded. Capitalists haven't reinvested mainly because their profit rates haven't been good enough. Their bad sales, in turn, can be traced back not to a lack of "consumer confidence", but to workers' decreasing financial capacity to fund consumption, which has only partially (and temporaraily) been boosted by personal borrowing.
With capacity overhang, any new investment in capital equipment is suicidal from the capitalist's point of view. To protect their profit rates further, they often cut deeply into production, equipment purchases and jobs.
This has led to recession, rising unemployment and even less "consumer demand" — a vicious cycle which won't end until sufficient productive capacity is destroyed and sufficient numbers of firms go under.
Overcapacity is not a temporary phenomenon under capitalism, but a permanent one that keeps popping up in each boom-bust cycle. Capitalism "recovers" from each of these cycles at the expense of the weaker firms and, most of all, the workers.
Capitalists' path to recovery from this recession, therefore, lies in brutal assaults on jobs and conditions. The IMF forecasted in May that the seven richest countries will see their unemployment rising from 5.7% in 2000 to 5.9% in 2001 and 6% in 2002.
More than likely, capitalist governments in a recession will further cut taxes for or increase handouts to the capitalists "to ease their pain". This will be financed by shifting a higher proportion of the tax burden onto workers.
The shadows over Third World workers are even longer. With many Third World countries hardly having recovered from the 1997-98 crisis, a recession in the main imperialist economies will squeeze their sources of much-need credit and undermine their export markets, especially for primary commodities.
A tough class battle lies ahead.