World GDP troughs too

As I mentioned yesterday, today I would show you what's been happening to world GDP.  These are my calculations, using national GDP data and weighting them by the percentage each country is in world GDP, using purchasing power parity (PPP).   It sounds a bit incestuous but believe me it works.  Both series in the chart show quarterly percentage change at annual rates.

Again, big regional/continental divergences in growth rates, with Europe negative in Q4, and the US strongly positive.  This divergence is because of fiscal policy, with the US expanding government spending with the "IRA" and Europe contracting spending because of budgetary crises.  Germany risks duplicating the UK's mistake of austerity after the GFC; and Germany is Europe's biggest economy.  Contracting government spending during a downturn doesn't balance the budget, it just drives the economy into deeper recession.

Because of structural weakness in China and foolish austerity in Europe, the economic recovery will be sluggish.

Britons now blame Brexit for everything

 I think the Conservative Party deserves a lot of blame too.  Austerity, neo-liberalism, cutbacks, tax cuts for the rich:  none of these has worked.  Brexit was a supremely silly idea, but the far-right ideologues who loved it wouldn't listen to anyone else.  They knew better.  Except they were hopelessly wrong.  The same is true of neo-liberalism.  40 years of experience has showed that it has failed.

World growth slowing

 It's perfectly normal for growth to slow after a strong rebound, as 'catch-up' effects diminish.  That doesn't mean that a new recession is happening, or at least, not necessarily.   ThePMI (Purchasing manager index) surveys are the most timely indicator of the state of economies for the previous month, becoming available on the first day of the new month.  What I have done in the chart below is to extreme-adjust each country's PMI, weight them by their share in world GDP, and add the results together.   The 'Big 8' include the USA, Euro zone, the UK, Russia, Japan, Brazil, India and China, and represents 70% of world GDP.   I don't have PMIs earlier than 2011 for countries other than the EU, the USA and China,  but there are other similar surveys with data going back two decades  or more, so I spliced these series together to produce continuous data chains back to the late 1990s.

The PMI for the 'Big 8' has slipped from its post-covid highs, but is still at the levels reached in previous high points, such as the recovery from the 2008/2009 GFC and the Trump tax-cut boom in 2017/18.

We're not yet on a road to recession or stagnation.  However, as Central Banks reset interest rates back to pre-pandemic norms, the chance of a global slowdown in 2024 increases.  An attempt to cut budget deficits using austerity instead of growth makes a downturn more likely, more quickly.  Note how the world PMI fell below 50% in 2012 when the EU foolishly insisted on tax increases and spending cuts to balance member budgets.

How Portugal ended austerity & got growth

It is a truism in economics that everybody's expenditure is somebody else's income.  If a single individual practises austerity, and cuts their income, then that won't have any effect on overall GDP, because one person's spending is small in relation to the totality.  On the other hand, if a major participant in the economy cuts its expenditure, then it's highly likely overall income will fall.  For example, if government spending makes up 30% of GDP, and the government cuts its spending (or raises taxes) by just 3%, GDP would fall by at least 1%, probably more, because all those whose incomes have fallen will themselves spend less, creating a multiplier effect rippling through the whole economy. 

Since personal income tax and corporation tax is leveraged to GDP growth, i.e., it rises faster than GDP in an upturn and fall faster in a downturn, then any attempt to balance the budget by raising taxes and cutting spending will often fail.  Neo-liberalism prescribes austerity to reduce deficits, even in the teeth of the the evidence that this doesn't work.  Portugal is a good example of this.

From Scoop.me

Considering the booming economy, dropping unemployment numbers and the return of many once-emigrated young Portuguese citizens, it seems Portugal is on the rise. Facing the policies of socialist Prime Minister António Costa, which include properly supporting the welfare state and investing in the public sector instead of austerity measures, right wing populists don’t stand a chance.

Not too long ago, Portugal stood on the brink of catastrophe: harsh austerity policies and the erosion of labour rights pushed by the conservative government lead to significant rises in poverty and unemployment. The economy dwindled due to the lack of peoples’ spending power.

Today, everything has changed:

“Nowadays, Portugal is considered a prime example among European countries: the economy is booming, unemployment is dropping and investments are rising.” 

What are the reasons for this turnaround? What makes Portugal special when compared to other countries?

The first major change occurred during the general election in 2015. At the time, the right wing conservative government was dismantling the social welfare state piece by piece, which resulted in a furious population voicing their dissatisfaction in the voting booth – the conservatives lost 11 percent of their previous electoral votes.

Lisbon’s former mayor António Costa, a socialist, won by a landslide and brought in 32 percent for the Partido Socialista after being elected frontrunner a year prior and uniting the entire city of Lisbon during his time as mayor.

Costa succeeded in uniting the severely split left wing in Portugal, who came together to support his minority government. At first, observers were pessimistic about the potential of this coalition, predicting a collapse after a few months. Moreover, both the EU and German minister of finances saw a grave mistake in the departure from austerity. Angela Merkel described the prospect of a radical anti-austerity coalition in Portugal as “very negative”. The president of Portugal went further, calling non-conservative economic policies a “danger to national security” and attempting to keep the old government in power.

It’s been more than four years since the socialist party assumed the reins of government. The scepticism of the early days has virtually vanished. The entirety of Europe seems impressed by the success story of António Costa:

The Portuguese economy has been booming for 4 years, and 2017 marked the largest national economic growth of the century.

The Portuguese are not only showing the feasibility of socially conscious policies, but demonstrating the significant potential for success.

“The budget deficit has dropped to its lowest ever since the change to a democratic system in 1974 – simply because the government re-established and strengthened the social welfare state, leading to the Portuguese people having more money to spend.”

The socialists raised the once slashed wages and pensions, reintroduced paid vacations and retracted many tax raises, all while raising wealth taxes which affected only the rich constituents of the population. The government also introduced a property and real estate tax designed not to target the homes of average citizens. Crucially, Costa’s socialists put an end to the catastrophic privatisations that were once mandated by the EU and resulted in selling state assets at absurdly low prices.

“The assumption that one could save the economy by aggressively cutting wages and excessively attacking welfare programs was clearly a misconception”, Costa said about his predecessors.

Portugal’s swift rise from a nation in shambles to prime example is remarkable. Costa gave hope and pride back to the people after the country was shaken to its foundation by the EU’s austerity programs and the failed previous government.

The newfound optimism also influenced the outcome of the 2019 parliamentary elections

Costa’s Socialists (PS) won the parliamentary elections in Portugal with 37 percent – well ahead of the conservative Social Democrats (PSD). They finished second with 28 percent of the vote, Costa won [gained] over 4 percent and came first. The number of socialist MPs rose from 86 to 108, with the socialists winning 15 out of 20 constituencies – 8 more than in the 2015 general election.

In the current political climate, which is full of optimism, the Right cannot get a foothold.

“If young Europeans are radicalized in city districts that were economically left behind, we have to answer with social policy measures”, Costa summarized his agenda in an interview with the German newspaper Der Spiegel.

The remarkable economic growth of the past years is only the beginning. Under socialist rule, the economy grew so significantly that the money made is now set to be invested and returned to the general population. Portugal’s government plans to use the rising public sector revenue to transform the nation into a more just and modern one, after the destabilized infrastructure under the conservatives.

Costa presented a nation-wide investment proposal and surprised many once again: 20 billion Euros is considered an incredible amount of money for a country the size of Portugal. 60 percent of the funds is to go towards public transportation; the remaining money will be invested in the energy sector and environmental projects. 

The much-used railway line connecting Lisbon and Porto is to be modernized, urban subway networks will be expanded and further investment will go into public transportation in rural areas. This will generate new jobs, revitalize the economy and lift public transportation onto a state-of-the-art level. Furthermore, Portugal will become more eco-sensitive in the process. And Portugal did all this with a solid budget – in 2019 it even achieved budget surpluses.

[In case of new republication, please cite Kontrast.at/Matthias Punz as the Source/Author. The rights to the content remain with the original publisher.]

In 2019, Portugal's GDP growth was 2% (real), vs Europe's 1.4%.

The perils of ill-advised austerity

Europe's real GDP, i.e., after adjusting for price rises, is still below the pre-GFC peak.  An astonishing achievement.  This assumes a small rise in QII (data not yet available), which may not happen given the state of PMIs across Europe.  IP (industrial production) across core Europe is slowing, GDP will surely follow.  7 years of blunder and failure.  A triumph.  Provisional PMI for July out tomorrow.  We'll see what that shows.

Soft underbelly

This graph shows the weighted average of industrial production for Greece, Italy and Spain, among the 5 or 6 European economies hardest hit by the Global Financial Crisis (GFC).  You can see the impact in 2008 of the meltdown in the US, and the slow recovery in 2009 and 2010.  Then these economies started to fall again, this time a European own-goal, as German-imposed economic and financial orthodoxy forced swingeing fiscal austerity.  The US ran massive (federal) deficits, and so its recovery, though sluggish, still actually happened.  In the grip of a malign madness, Greece, Spain, Italy, Portugal and Ireland by contrast were forced to slash spending and up taxes, and naturally, their economies plummeted.  During 2013, the fall stopped, but as you can see, there's scarcely a boom going on.

The total decline in IP and GDP, the jump in unemployment and dire poverty, all these were as bad as the Great Depression in the US.  And frankly, it could take a decade before the economies of these countries pass their previous peaks.

Fiscal folly

From an article by Joseph Stiglitz in today's The Age newspaper:

While other countries fell into the global recession, Australia maintained strong economic growth, low government debt and a triple-A credit rating. With this record, you might expect the federal election to be focused on how to convert the strength of today's economy into resilience for the future. But instead the political spotlight has fallen on the perceived problem of government debt, with alarming proposals to bring austerity ''down under''.

For an American, Australia's anxiety about deficit and debt is a little amusing. Australia's budget deficit is less than half that of the US and its net debt is less than an eighth of the country's gross domestic product.

Most countries would envy Australia's economy. During the global recession, Kevin Rudd's government implemented one of the strongest Keynesian stimulus packages in the world. That package was delivered early, with cash grants that could be spent quickly followed by longer-term investments that buoyed confidence and activity over time. In many other countries, stimulus was too small and arrived too late, after jobs and confidence were already lost.

Advertisement

In Australia the stimulus helped avoid a recession and saved up to 200,000 jobs. And new research shows that stimulus may have also actually reduced government debt over time. Evidence from the crisis suggests that, when the economy is weak, the long-run tax revenue benefits of keeping businesses afloat and people in work can be greater than the short-run expenditure on stimulus measures. That means that a well-targeted fiscal stimulus might actually reduce public debt in the long run.

Australia may have successfully dodged the global crisis, but some politicians seem to have missed the lessons it taught the rest of the world. In this election, the conservative side of politics has foreshadowed substantial cuts to the government budget. This would be a grave mistake, especially now.

Recent experience around the world suggests that austerity can have devastating consequences, and especially so for fragile economies. Government cuts have helped push Britain, Spain and Greece's economies deeper into recession and led to widespread public misery.

The youth unemployment rate in Spain is above 50 per cent and the figure for Greece is above 60 per cent. Their tragic experience should be a warning to the world. But even seemingly healthy Germany was pushed into a recession from which it is just now emerging - but it is an economy that is still weaker than it was before taking the "dose" of austerity.

Proposals for substantial budget cuts seem particularly misplaced at this time given that Australia's economy is confronting new global challenges. Commodity prices are softening and growth is slowing in many key export markets. Australia is already facing declining mining investment. The slowdown in economic growth is not the result of flaws in government policy, but of an adverse external environment. It would be a crime to compound these problems with domestic policy mistakes.

Sharp cuts to public spending over the next few years will exacerbate these challenges. Withdrawing government spending as the economy weakens risks tipping Australia into recession and increasing unemployment.

Assuming standard multipliers(1), cutting public spending by $70 billion from an economy the size of Australia's over a four-year period could reduce GDP growth by around 2 per cent and cost up to 90,000 jobs.

Instead of focusing mindlessly on cuts, Australia should instead seize the opportunity afforded by low global interest rates to make prudent public investments in education, infrastructure and technology that will deliver a high rate of return, stimulate private investment and allow businesses to flourish.

Read more here.

(1) In fact the multipliers in those European countries which blindly imposed fiscal austerity have been unexpectedly large.

Read more: http://www.theage.com.au/comment/australia-you-dont-know-how-good-youve-got-it-20130901-2sytb.html#ixzz2e0mZx5AC

Lessons from history

I've talked before about the follies of trying to balance the budget during recessions. Here's a new and compelling example from an intriguing and instructive piece from Martin Wolf.


The UK emerged from the first world war with public debt of 140 per cent of gross domestic product and prices more than double the prewar level. The government resolved both to return to the gold standard at the prewar parity, which it did in 1925, and to pay off the public debt, to preserve creditworthiness. Here was a country fit for the Tea Party.

To achieve its objectives, the UK implemented tight fiscal and monetary policies. The primary fiscal surplus (before interest payments) was kept near 7 per cent of GDP throughout the 1920s. This was, in turn, accomplished by the “Geddes Axe”, after a commission chaired by Sir Eric Geddes. This recommended slashing government spending in precisely the way today’s believers in “expansionary austerity” recommend. Meanwhile, the Bank of England raised interest rates to 7 per cent in 1920. The aim of this was to support the return to the prewar parity. Coupled with the consequent deflation, the result was extraordinarily high real interest rates. This, then, was how the self-righteous fools in the British establishment greeted the hapless survivors of the hellish war.

So how did this commitment to fiscal famine and monetary necrophilia work? Badly. In 1938, real output was hardly above the level of 1918, with growth averaging 0.5 per cent a year. This was not just because of the Depression. Real output in 1928 was also lower than in 1918. Exports were persistently weak and unemployment persistently elevated. High unemployment was the mechanism for driving nominal and real wages down. But wages are never just another price. The aim was to break organised labour. These policies resulted in the general strike of 1926. They spread a bitterness that lasted decades after the second world war.

Quite apart from their huge economic and social costs, these policies failed in their own terms. The country went off gold, for good, in 1931. Worse, public debt did not fall. By 1930, debt had reached 170 per cent of GDP. By 1933, it had reached 190 per cent of GDP. (These numbers put the panic over today’s far lower ratios in perspective.) In fact, the UK did not return to its pre-first world war debt ratios until 1990. Why was the UK unsuccessful in lowering the ratio of debt to GDP? Briefly, growth was too low and interest rates too high. As a result, even a huge primary fiscal surplus could not constrain the debt ratio. 

The consequences of this folly were devastating. As a result of economic weakness, Britain lost its place in the world order, going from being the greatest superpower to a has-been.  It was left with an enduring class hatred, which embittered politics and slowed economic growth for two generations.  And how much of the appeasement of the 30s came from the absence of money to pay for rearmament?

There are obvious lessons here not just for the Tea Party numpties but also the the austerity ghouls in Europe.  The West risks negligible growth for two decades while the rest of the world powers ahead, pointlessly  since the austerity is unlikely to cut government debt.  The parallels with the US are frightening   Read the whole piece, it's really worth it.

Jackson's Hole

Yep.  It really is called that.  Every year at about this time, the heads and support staff of the world's major Central Banks retreat here to discuss the problems facing the world economy and what they should do about it.  Ben Bernanke said a day or so ago that he was very concerned about the unemployment rate in the US and how slowly it's fallen this year.  And he said that the Fed would if it was necessary do something about it.  On the strength of this, share markets rallied, and the bulls swished around all excited.  Delicious animals.

The problems with o'erweening optimism are these:

• Major markets are at previous highs (see charts).  To rise through these highs will require either much better economic data and/or serious, credible stimulatory measures in the US and China and Europe. Comforting words from Ben are not enough. Not any more.
• The Chinese share market, though, isn't at previous highs.  It's slumped.  And that's because the Chinese leadership is embrangled in a leadership struggle, one that happens every five years, but which has had the bad taste to happen now when the Chinese economy is slowing sharply.  No one wants to make key decisions until they know who's going to be boss.  This is complicated by a shift in the Chinese growth model from export-led growth.  Lots of big decisions and no one to make them, probably until November.
• The US (20% of the world economy) is still facing a "fiscal cliff" in January, when the rolling back of previous tax cuts and mandatory expenditure cuts will slice 4 or 5% from GDP.  We've all seen the result of swingeing austerity in Europe.
• And, talking of Europe, even though a dim awareness that deep expenditure cuts and tax increases are counterproductive seems to be percolating through even to the Germans, so much needs to happen to generate a recovery -- an end to fiscal austerity; a common bank oversight model for the whole Euro zone; massive quantitative easing; and rate cuts.  They will happen in time, but while we await, markets could get very skittish.  Not so good, kitty malloona.  

I'm taking some money off the table and watching sectoral swings like a ... fund manager should.   Perhaps share markets will just go sideways for a while and then resume their uptrends.  And perhaps not.