Recovery — Fact or Fiction? (1994)

Cartoon by George Meddemmen.

From the April 1994 issue of the Socialist Standard

In an article in the Socialist Standard last May we described how politicians and media commentators had developed a whole new terminology when describing what in fact was a developing recession.

From Norman Lamont's announcement that "recovery had begun" in June 1991 terms such as "growth recession”, "slowdown in growth", "soft landing" have all been used in the press to describe what we know was the commencement of a major economic slowdown. As conditions worsened we were told that it was going to be "a shallow depression of short duration" in an economy that needed "kick starting".

Recovery under way?

This year, almost in chorus, the press are telling us that recovery is under way here and abroad with one or two qualifications. According to a CBI survey published in the Daily Telegraph (11 January) it is "fragile and patchy". The survey also concludes that "no U.K. region has totally eliminated recession".

The consensus view expressed in the popular press is that the United States is leading the world out of recession, and that a strong recovery is underway in Britain and the emerging economies of south-east Asia.

It is not that long ago that Germany was to be the source of a booming recovery following unification. Prior to this Japan was the "wonder economy" of the Far East. Both these countries are now in deepening recession.

In Germany unemployment is now 9.6 percent of the working population. Volkswagen announced it would bring in a four-day week following losses of £612 million and an 11.4 percent slump in sales in the first nine months of 1993 (Daily Telegraph, 26 November). The level of unemployment of just over four million has prompted comparisons with the Weimar Republic when unemployment touched five million in 1933 and Hitler took power. The prospect of an export-led recovery has not materialized. "According to the Economic Ministry, orders received by Germany Industry fell by 0.8 percent after declining by 0.6 percent in October" (Daily Telegraph, 6 January).

Rising unemployment

With rising unemployment the pressures on the public sector debt has increased. Describing this in an article entitled "Up. up and away", the Financial Times says that

  total overall public sector debt will sail through another Maastricht convergence criteria, topping DM 2000 billion or more than 60 percent of GDP. The last straw has been the addition of East German debts of DM 275 bn to the total.

Private household debt has reached record levels with industrial bankruptcies close behind. "The recession has driven one in two households into debt with 1.5 million families out of a total of 35 million estimated to owe an average of £16,000" (Daily Telegraph, 7 October).

Europe too

France like Germany, has all the features of a deepening depression. Unemployment is 12 percent. Car sales are falling. It too has increasing problems with its welfare budget, resulting in the unemployed having cuts in their dole payments whilst a group of nurses staged a 500 days’ protest outside the Ministry of Social Affairs as a protest at understaffing and poor pay (Financial Times, 24 November).

In Britain, in spite of the optimistic announcement of recovery by politicians and others, the economy is still in a contained depression. This means it has been contained to some extent by public, personal and corporate borrowing as well as relatively low-interest rales. But these factors can only have a transient effect.

Of course it wouldn’t be Spring without the usual optimistic cuckoo noises from the building societies.

The Halifax Building Society has published its Monthly Index of house prices and announced an increase of 2.2 percent in February. If the implication is that this is likely to continue then house prices would rise by 27 percent for the whole year. This is difficult to reconcile with the fact that between one and one and-a-half million owners are living in houses that are worth less than they owe to the banks and building societies. With this amount of debt outstanding and the tax increases in the budget plus the lowering of interest rate relief on mortgages, recovery in this market is unlikely.

Retail sales are often quoted as evidence of recovery. The optimistic forecasts for retail sales have failed to match expectations. The Xmas sales improvements forecast last year have turned out to be a damp squib.

Price war

Overall sales fell by 0.2 percent over the sector. Supermarkets such as Tesco, Sainsbury. ASDA and Safeway are now engaged in a price-cutting war. This sector has often been described as counter cyclical in periods of recession. Sainsbury have even been considered recession-proof and cited as evidence of recovery based on their results. When, however, it announced reductions in the price of 300 basic food items, the fear that this would escalate price-cutting by their rivals led to a fall in the share prices of food retailers including their own (Daily Telegraph, 4 November). The company has subsequently announced forthcoming staff cutbacks.

The United States is now said to be in a recovery of sufficient strength to lead the world out of recession. Whilst it is undeniable that there has been an increase in housing starts as well as an increase in manufacturing and purchase of machinery and equipment, much of this equipment has been cost-cutting which will be lead to idle capacity elsewhere.

The increase in housing starts have been to a large extent due to very low interest and mortgage rates. Non-residential construction has remained flat. Whilst there has been a rise in published GDP statistics there has not been a corresponding rise in living standards commensurate with a sustained recovery. Much of the optimistic projections failed to consider the huge personal debt that still exists in America.

In an article in the Financial Times (4 January) entitled "Locomotive runs out of Puff", Robert Giordano forecasts a slowdown in US economic growth:

  Households will be unable to sustain their consumption binge because it cannot be financed. Outlays have been rising at a 4 percent annual clip since early 1993 while real disposable income growth averaged only 2.5 percent.

Commenting on America’s problems he writes

  foreign trade prospects look bleak despite completion of the Uruguay Round. A deteriorating trade balance has restrained growth and should do so in coming months. 

He also points out that US GDP adjusted for inflation has yet to equal the level achieved in 1988. As in Britain, the deficit has been cushioned by a huge Federal Deficit and by deposit insurance to prevent a financial crisis as in the 1930s. But this cannot continue indefinitely. The outstanding debts have still to be eliminated. The recession in Europe and the trade disputes with Japan does not bode well for US exports.

Economic opinion formers in the rest of the world have been waiting three years for the US to act as the world’s locomotive for growth. It seems that they will have to wait longer yet.

Italy is still plagued with massive public spending problems and political scandals. Unemployment is 11.5 percent. Public spending is equal to 114 percent of GDP at a time of low growth and rising interest rates (Financial Times, 28 February).

Spain, like Italy has political scandals. The banking system was recently shaken by the collapse of the Banesto Bank which had to be bailed out by the Central Bank of Spain after depositors rushed to withdraw their savings. Spain has the highest rate of unemployment in the European Union at 23.1 percent.

Japan, formerly the miracle economy of the 70s and 80s and until recently the largest economy in the world, is moving into deeper recession. The Normura Research Institute has forecast that the economy will shrink by 0.4 percent this year and blamed the expected shrinkage on a continuing fall in corporate earnings and capital spending in coming months (Financial Times 10 December). Three attempts by the government to stimulate the economy along Keynesian lines have not produced a recovery.

Nippon Steel has built a $240 million new steel plant in Nagoya which has yet to open. Steel output in Japan has fallen by 40 percent. As the Wall Street Journal reported in January one of the largest property companies in Japan AZBUV has total debts amounting to twice the value of its assets. According to the Economist (19 February') it will take Japanese banks ten years to clear their debts provided conditions do not worsen further.

Japan is expected to have the highest percentage of people over 65 among the industrial nations by the end of the century. As elsewhere many consumer prices are falling. Unemployment is 2.9 percent but the security of job tenure is becoming impossible to maintain. With production and exports declining Japan is an accident waiting to happen. There can be little doubt that with deflationary recession sweeping Japan there will be repercussions on the rest of the world economy.

Here in Britain the Chancellor of the Exchequer is advised by the Seven Wise Men. They are economists who suggest ways of "managing" the economy. This usually consists of recommendations on interest rates, taxation and the monetary aggregates such as the money supply. However, the Seven do not always agree on the remedial measures to be adopted. One of the most optimistic is Professor Patrick Minford of Liverpool University. He considers that recovery is underway and is being held back by failure to reduce interest rates and lower taxation. Opposing this view is Professor Congdon of Lombard Research who vigorously advocates higher taxes and interest rates to control public spending. The Seven rarely reach a unanimous conclusion. They think that by tinkering around with the monetary aggregates depressions can be smoothed out. Of course they cannot achieve this. If they could it would be possible to prevent these economic upheavals from arising.

Inherent dislocations

They fail to realize that the major dislocations in the capitalist economy are inherent to the capitalist system. The bulk of what passes for economic opinion tends to look at the world economy as if the conditions that have applied since 1945 are the only ones applicable. With the ascendancy of Keynesian economics in the post-war period with massive public spending and money supply growth and with the inevitable consequent inflation, it has been assumed that the Great Depression of the 1930s is something from an economic dark age and which won’t be allowed to happen again.

In interpreting economic events orthodox capitalist economists tend to take short-term trends and project them in linear fashion into the future in the way in which the Halifax Housing Index was used earlier. An increase in production over a three-month period is projected forward as a positive trend. They fail to realize that capitalism is fundamentally chaotic in its movements. The fact of the matter is that we seen to be in an era of falling prices, rising unemployment and financial instability on a global scale. In short, the current economic environment has much more in common with the conditions of the 1930s.

Looking at the economic indicators in the Economist (26 February) of the 15 industrial countries listed 13 have shown year-on-year increases in unemployment. Industrial production has exceeded four percent in only four.

Taken on a global view there is no convincing evidence of an upturn anywhere of sufficient strength to lead to world recovery. The probability that we are entering into another 1930s scenario cannot be dismissed out of hand. The fact that millions of people may consider it too terrible an event to contemplate does not mean it cannot happen. Five years ago many people believed that the housing crash with people thrown out of their houses was something the government would not let happen. Sadly they know otherwise now to the extent of 250,000 repossessions in five years.

The propaganda of strengthening recovery this year is being put out by the same official sources that promised this last year as well as every year back to 1991. They were wrong then so why should their promises of recovery be taken seriously now?

Terry Lawlor