The idea that the green shoots of economic recovery are sprouting everywhere has become entrenched among a layer of economic pundits. They cite the fact that the stock markets have been rising quite strongly.
For example, the US Standard & Poor’s 500 Index has risen by a third since March.
Anyone who is impressed by this has forgotten that the stock markets rose during the first few months following the explosion of the economic crisis in August 2007, encouraging various overpaid idiots to claim there was no real problem.
The latest World Economic Outlook from the International Monetary Fund (IMF) has revised down its forecasts. It predicts that global output will fall this year for the first time since 1945, by 1.3 percent.
Japan, one of the great manufacturing and export powerhouses of the world economy, reported a trade deficit of £5 billion in the year to March, the first time this has happened since 1980. This reflects how sharply international trade has fallen.
In Germany, another powerhouse, the government now predicts the economy will shrink by 6 percent this year.
Announcing the figures, the German economics minister said one and a half million workers will lose their jobs this year and next.
Fortunately, this decline will not continue indefinitely. Free market economists are not completely wrong to say that there are self-correcting mechanisms that will work to push output upwards.
One of these concerns the inventories of finished goods held by firms. When demand falls during a recession, companies can’t sell their products and so they are stuck with big inventories of unsold goods.
They cut production till they have sold these. When this has happened, production will rise to supply more goods to meet demand.
But mechanisms like this aren’t enough to generate powerful economic growth, especially in as severe a recession as the present one. That’s why governments have introduced fiscal stimulus packages, cutting taxes and increasing borrowing and spending, in the hope of maintaining demand.
But this too isn’t likely to be enough to bring recovery. This is partly because the capitalist class is split over the desirability of fiscal stimulus.
A powerful faction – headed internationally by the German government – argues that higher government borrowing will simply pile up government debt, adding to the burden on the economy.
This faction is now in the ascendant in Britain, with Tory leader David Cameron proclaiming a new “age of austerity” and campaigning for public spending cuts.
Quite apart from these divisions, the IMF believes that “even once the crisis is over, there will be a difficult transition period, with output growth appreciably below rates seen in the recent past”.
A chapter of the IMF’s World Economic Outlook is devoted to a study of recessions and recoveries from them.
Two of its findings are particularly alarming. First, “Recessions associated with financial crises have been more severe and longer lasting than recessions associated with other shocks.
“Recoveries from such recessions have been typically slower, associated with weak domestic demand and tight credit conditions.”
Second, “Recessions that are highly synchronised across countries have been longer and deeper than those confined to one region.
“Recoveries from these recessions have typically been weak” because it’s much harder to recover by increasing exports if the entire world economy is depressed.
The IMF concludes: “The downturn is likely to be unusually severe, and the recovery is expected to be sluggish.” In other words, even when the world economy stops shrinking, it is likely to find itself trapped in a long period of slow growth.
No wonder that people are beginning to call this the “Great Recession”, like the Great Depression of the 1930s.