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This recession still has a way to run

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Is the worst of the economic crisis over? BBC Radio 4’s Today programme has been babbling about this for the past week or so, and Barack Obama has now joined them.
Issue 2147

Is the worst of the economic crisis over? BBC Radio 4’s Today programme has been babbling about this for the past week or so, and Barack Obama has now joined them.

He said on Friday of last week that he saw “glimmers of hope” in the US economy. This followed more cautious comments by Lawrence Summers, chair of the US National Economic Council, who said that the “sense of free fall” would end in the next few months.

Meanwhile, the stock markets are up. The Dow Jones Industrial Index rose by 23 percent in the month before Easter.

Anyone who takes this stuff too seriously is kidding themselves. We are in the grip of the worst economic crisis since the 1930s. What became clear after the collapse of the Lehman Brothers bank last September and the ensuing stock market crash was that the financial crisis was morphing into a severe global recession.

The International Monetary Fund (IMF) predicts that global economic output will contract by 0.5 or 1 percent this year. This will be the first time that the world economy has shrunk since 1945.

The advanced economies are being especially hard-hit. According to projections from the Organisation for Economic Cooperation and Development (OECD), the US will shrink by 4 percent in 2009, Japan by 6.6 percent, the euro-zone by 4.1 percent, Germany by 5.3 percent, and Britain by 3.7 percent.

The big manufacturing and exporting economies such as Japan and Germany are suffering even more severely than the US and Britain, where the financial crisis started. This is because of the sharp decline in global demand for the industrial goods they produce. The OECD says that, after growing for much of the present decade by 8 percent a year, “international trade [is] in free fall”, and will shrink by 13.2 percent this year.


At some point, however, the world economy will stop shrinking and may even start growing a little. Even then unemployment will continue to rise. The OECD predicts that “the number of unemployed in the G7 countries will almost double from its level in mid-2007 to reach some 36 million people in late 2010”.

One reason why the world economy will eventually hit a plateau is that the leading capitalist states have been cutting taxes and increasing spending in an effort to combat the very powerful contractionary tendencies at work.

But these efforts are very unlikely to produce anything resembling economic lift-off. As I have already said, this started as a financial crisis. Much of the banking system is effectively bust because of the bad loans many banks made during the credit bubble of the mid-2000s.

The IMF has now raised its estimate of these losses from a mere $1 trillion to a staggering $2.2 trillion. As long as the banks are stuck with these losses, they won’t lend, paralysing much economic activity.

We may find ourselves in the plight of Japan after its “bubble economy” collapsed in the 1990s. It stagnated for a decade while the banks and industrial firms paid off the bad investments they had made during the speculative boom of the late 1980s.

Many commentators are worried that the G20 summit did nothing to solve the problem of the banks. “You won’t have a recovery until you cleanse the [banking] system, but nobody wants to discuss it,” an anonymous official, probably from the IMF, told the Financial Times on the eve of the summit.

For the same reason, Wolfgang Munchau, one of the same paper’s best writers, headlined his column last week, “The London summit has not fixed the crisis”.

He wrote, “If the crisis shows no sign of ending in the autumn, our great leaders may gather for another desperate summit, in another city, facing another set of protesters, producing yet another series of desperate but ineffective pledges to save the world economy, embedded in another pretentious communique.”

We’ll see whether or not this particular prediction turns out to be right. But one thing’s for sure. This is a very big crisis that still has a long way to go.

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