By ANDREW POLLACK
Signs of a renewed, coordinated global economic downturn have grown in the last few months. Of course, given the inherent anarchy of the capitalist system, the “coordination” is more in the nature of a self-reinforcing downward spiral, as each sector drags the others down with it.
One sees the spiral right away in news of stagnation in the world’s largest economy. In the second quarter the U.S. economy grew by just 1.5%. The New York Times attributed the slow pace to curbing of purchases by both consumers and businesses “in the face of a global slowdown and a stronger dollar. …
“The mired recovery makes the United States more vulnerable to trouble in Europe and, at home, the potential expiration of several tax breaks and other buoyant measures at the end of the year, known as the fiscal cliff. … The [official] unemployment rate has stalled above 8% in recent months.”
The Times saw little hope in the short term: “Improvement strong enough to provide real traction or lower the jobless rate remains out of reach. Wrote Jim O’Sullivan, the chief United States economist for High Frequency Economics, ‘there does not appear to be much basis for expecting a significant pickup any time soon.’”
Of particular worry was the social media sector, once thought to be the foundation of a lucrative new internet era. But now, according to The Times (July 27), these corporations were stumbling on the stock market, providing “echoes of the crash of 2000, when the money stopped flowing, the dot-coms crumbled and Silicon Valley devolved into recriminations and lawsuits.”
The Economist reported on June 9that “hopes that 2012 would be the year when America’s economy at last shook off its lethargy seem dashed. Employers and investors face increasing uncertainty in every big economy. China, India and Brazil have slowed sharply. The euro zone is dangerously close to collapse. Goldman Sachs reckons that the spillover of European stress into American financial markets will knock 0.2 to 0.4 percentage points off growth this year.
Spillover from Europe’s crisis
The vulnerability of the U.S. economy to Europe’s woes was highlighted in a July 26 Wall Street Journal article reporting profit slumps at U.S.-based multinationals with large production and/or sales in Europe: “Europe’s deepening economic crisis is cutting into corporate earnings, with the continent’s woes threatening to exert a drag on multinational corporations around the world.”
The corporate alarm bells highlight how the miserable economic conditions in much of Europe are spilling onto the global stage. With much of Europe in recession and unemployment soaring, spending is sliding on everything from big-ticket items like cars to everyday staples like yogurt.”
Rebutting a commonly-voiced hope that Chinese expansion could pull everyone’s irons out of the fire, The Wall Street Journal noted: “For all the attention devoted to China’s growth, the 27 countries of the European Union are the largest economy of the world. Europe accounts for about one-fifth of all U.S. exports.” The Deutsche Bank’s chief U.S. equity strategist estimates 17% of profit and revenue of the S&P’s 500-stock index companies comes from Europe.
The paper added: “The downturn in Europe is weighing on China, for which Europe is a big market, and is threatening to retard an already slow-growing U.S. economy as well.” The Journal said that among the 60% of S&P 500 companies in the U.S. who missed second-quarter revenue predictions, “many companies have cited Europe as a factor.
“’The ongoing European crisis presents the biggest risk to our economy,’ U.S. Treasury Secretary Timothy Geithner said. ‘The economic recession in Europe is hurting economic growth around the world, and the ongoing financial stress is causing a general tightening of financial conditions, exacerbating the global slowdown.’”
And worse is coming, as government austerity measures imposed supposedly to solve European countries’ debt crises take effect: “’We are in a vicious circle,’ said a BNP Paribas economist, arguing that government austerity is leading households to cut spending, which lowers tax receipts and leads to more austerity. ‘Everyone is afraid. Governments are afraid. Households are afraid. Companies are afraid.’”
Europe’s auto sector—in which U.S. companies are big players—did particularly poorly in the second quarter. Ford suffered a 57% drop in global earnings in the second quarter, largely on a $404 million loss in Europe, and lowered its 2012 profit forecast, citing overseas weakness.
GM lost 41% in the quarter, and has not made an annual profit on its European operations for more than a decade. But Ford of Europe was profitable until recently.
ArcelorMittal, the world’s largest steel maker, with operations on every continent, suffered a 50% drop in income in the second quarter as raw materials prices rose and steel prices slumped. It has begun cutting production in Europe, and is gearing up to seek massive wage and benefit concessions from the 12,500 workers in the U.S. covered by union contracts.
“The protracted euro zone financial turmoil,” said The New York Times on July 25, “has all but killed demand for steel in Western Europe. ArcelorMittal … produced more than a third of its worldwide crude steel in Europe last year. Nearly 100,000 of the company’s 260,000 employees work in Europe.”
Troubles for Germany
Meanwhile, the continent’s biggest and (relatively speaking) healthiest economy, that of Germany, is showing signs of being dragged down with the rest of Europe. On July 23, Moody’s downgraded its outlook for Germany, citing the huge potential cost of a euro breakup on the country and, alternatively, the steep bill that would be paid to hold it together. The ratings agency pointed to the vast liabilities Germany would incur in a bailout of Spain and Italy and its banking system’s “sizable exposures” to those two countries.
The warning to Germany followed a rush by investors out of Spanish bonds, leaving the euro zone’s fourth-largest economy at greater risk of needing a bailout, and sparking a selloff on global markets. Moody’s also cited renewed concerns about Greece, saying, “The material risk of a Greek exit from the euro area exposes core countries such as Germany to a risk of shock.”
In a prime example of the multifactorial vicious circles of the world economy, the July 23 Wall Street Journal noted: “Among investors’ chief concerns is that Spain won’t be able to find buyers for the tens of billions in new debt it must issue this year to raise cash. That lack of demand results from a confluence of worries. Spain’s economy is deteriorating rapidly, weighing on the government’s ability to bring in tax revenue; its financially strapped regions may need help from the central government; and its sagging banking sector remains capable of dragging the country down.
“Many investors fear Spain could be stuck in a downward spiral of slackening demand. The possibility that ratings firms could cut the country’s precarious credit rating, thus forcing some institutional investors to sell, looms.”
Further evidence of German weakness came in a July 24 Journal report that the country’s businesses cut their output at the fastest rate in more than three years in July, and in the broader euro zone companies cut back for the sixth straight month, raising fears of a recession spanning the 17-nation economy. “Output fell in the region’s two biggest economies, Germany and France, suggesting the downturn isn’t limited to the weaker nations embroiled in the sovereign-debt crisis. Falling output will make it harder for leaders to turn the corner on the crisis as tax revenues fall and social spending rises.”
Spain and Italy are respectively the euro bloc’s fourth and third-largest economies, and the economies of both shrank rapidly this year, making it increasingly likely that Germany—which depends on the euro zone for around 40% of its exports—will be affected.
In Spain, 5.69 million people ended the second quarter jobless, raising the unemployment rate to a record 24.6%. Youth unemployment rose to 53% in the second quarter. Yet as part of a new 65 billion euro austerity package, the government is set to lower unemployment benefits.
The Economist reported on July 7 that “within the euro area, the unemployment rate reached 11.1% in May, a record high on data going back to 1995 for the 17 countries now in the monetary union. The composite purchasing-managers’ index remained well below the 50 level that separates expansion from contraction (50 represents no movement, positive or negative).
And the magazine noted the global impact: “That industrial fragility has now spread around the world. In America the Institute for Supply Management’s manufacturing index fell in June to below 50, for the first time in almost three years. New orders plummeted, which suggests that the weakness will persist. One of the main reasons was a sharp decline in new export orders, with manufacturers blaming slacker demand in Europe and China. In its annual health-check of the American economy, the IMF this week said that recovery remained ‘tepid’ and fretted about the fallout from an intensifying euro crisis.
“In Asia, too, an industrial slowdown is under way. Japan’s Purchasing Managers Index (which tracks the willingness of companies to spend on their operations) slipped below 50 in June for the first time since November. After falling in recent months, China’s official PMI is now only just above that threshold [50.1 in July]. Any slowdown still hurts economies, like Brazil, that have thrived by selling commodities to China. Brazil’s manufacturing sector contracted for the third successive month in June.”
More vicious circles
Let’s bring it home to the United States and look at a few particular manifestations of the vicious circles reinforcing the crisis. On June 21 Moody’s reported it was downgrading the credit ratings of 15 of the world’s biggest financial firms, including Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, and Citigroup.
The sharply lower credit ratings may worsen results for these banks in the very areas that prompted the downgrades. To finance their operations, Wall Street firms rely heavily on short-term loans lasting a few days to a few months. But the downgrades could push up the costs of these loans, as the lower credit ratings might encourage lenders to think there is a higher probability that the banks won’t repay the money. The same will be true of these banks’ derivatives, as their clients may now demand better terms given the ratings decline, terms that mean greater pressure on those banks’ profits, meaning possible further ratings cuts.
The feeling of sinking into a whirlpool is increasingly common for workers. For instance, the June 19 New York Times reported how layoffs of public workers were slowing the economy: “Since its post-recession peak in April 2009, the public sector has shrunk by 657,000 jobs. The losses … have accelerated for the last three months, creating the single biggest drag on the recovery in many areas.” Federal spending cuts are impacting states, which in turn cut aid to localities.
A similar vortex is sucking down consumer spending: “The wage problems brought on by the recession pile on top of a three-decade stagnation of wages for low and middle-wage workers,” said Lawrence Mishel of the Economic Policy Institute. “In the aftermath of the financial crisis, there has been persistent high unemployment as households reduced debt and scaled back purchases.”
The state of working-class fightback against these attacks in the U.S. is still severely limited—although the memory of recent upsurges from Madison to Occupy has not faded and may yet inspire a rising tide of resistance.
Given the global and mutually reinforcing nature of the various aspects of the crisis, U.S. workers would do well to look at other recent examples of fightback around the world, from the spreading strikes in Egypt to the millions who repeatedly rallied in Spain this summer. This is necessary not only in order to draw inspiration from others’ combativity, but also to tighten ties with militants around the world fighting the same global system, even if their mobilizations arise initially from specific, seemingly isolated manifestations of that crisis.