World economy slides into recession

Socialist Voice Summer 2001

Ruling class commentators surveying the state of the world economy seem to be suffering terrible mood swings at the moment.

By Tom Crean

One week they seize on some scrap of information to try to support the idea that the current downturn of the American economy is only a temporary dip and that the US will return to its role as engine of world growth by the end of the year. The next week they are gripped by panic at the mounting evidence that the US is heading into a deep recession while the Japanese economy is already in recession and growth in Europe slows rapidly.

The front page of the 23 June Economist carries the headline 'In the jaws of recession' and inside this mouth piece of finance capital editorialises that 'The world economy is starting to look remarkably, even dangerously vulnerable.' The focus for concern is of course the US where the first signs of serious trouble were the collapse in the price of technology stocks last year, the bursting of the ' bubble'.

Manufacturing began to slump in the last quarter of 2000. This year has brought a cascade of profit warnings from major corporations, more than 600 already in the second quarter. Profit warnings have been immediately followed by announcements of massive layoffs. Initial jobless claims have risen in the US at an annual rate of 50% in the past six months.

But the real fear for the capitalists is that there could a simultaneous downturn in the three key areas of the advanced capitalist world - the US, Europe and Japan. The last time there was a simultaneous recession in the US and Japan was during the sharp slump of 1974-5. The Economist cites one estimate that in the three months ending in May the total industrial output of these three areas fell by 0.5% on a year earlier, compared to annual growth of 6% a year ago. This is the sharpest drop ever-recorded in industrial growth rates internationally in a 12-month period.

Of course, it cannot be absolutely excluded that the US economy could rebound temporarily in the second half of the year, at least partly because of the impact of the 2.5% cut in interest rates since the beginning year combined with tax rebates in a relatively low inflation environment. But any recovery will be extremely weak and will only be a prelude to an even sharper downturn. The prospect is then for a massive increase in unemployment and social tension both in the 'advanced' capitalist countries but even more so in the underdeveloped economies already ravaged by the effects of two decades of globalisation.

This situation is not a surprise to socialists. A year ago there was still enormous hype about the 'new economy' (with the US as the key example) based on the service sector and new technology. It was claimed that the new economy would lead to such rapid gains in productivity as to make the business cycle a thing of the past.

These notions have now been exposed as dismally wrong. In fact as we have pointed out, each phase of capitalist development leads to such claims the hope among the ruling class that they can escape from the contradictions of their own system - but each time they are forced to admit, even if only in a backhanded way, that Karl Marx's analysis of the inevitably of the cycle of boom and bust under capitalism is correct.

In reality the crisis now affecting the world economy began with the crash of the 'tiger' economies of the Far East in 1997. This exposed the underlying problem of massive overproduction and overcapacity on a global scale. The world financial system almost collapsed in late 1998 but the American economy was cushioned by the flight of capital back from the Far East to the 'safe haven' of Wall Street. American consumers acted as a 'market of last resort' for several years. The 'flight to quality' in turn, however, only created a massive speculative bubble especially on the stockmarket that was bound to burst at some stage.

There has also been a massive growth of personal and corporate debt that at the end of last year stood at $15 trillion or 150% of GDP. The situation was further compounded by a squeeze on profits over the past few years with companies investing heavily in new equipment to try to maintain their market share in an increasingly competitive world market where the underlying reality was insufficient demand.

How will this affect Ireland and in particular the famous Celtic Tiger in the South? Growth forecasts by the 'experts' for 2001 were already revised downwards in March from 8-9% to 6-7% due to the effect of the slowdown in the US and foot and mouth. Actual growth in the South this year will almost certainly be lower than this. In general the ruling class in Dublin has been even more oblivious to the direction of events than their international counterparts, believing that somehow this small, open economy will be able to escape what is potentially the most severe international crisis in a quarter century.

However, the announcement of over 1,000 job losses, including 400 at Ispat (the former Irish Steel plant) in Haulbowline in Cork within the space of days in mid June was a sharp dose of reality. Reports of the softening of the housing market also may indicate the beginning of the end for some of the bubble aspects of the domestic economy. In general the economic prospects, North and South, are fundamentally conditioned by international developments. The pace and tempo may be different but recession is an inevitability in both states in the next period.

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