By MICHAEL ROBERTS*
Diagnosis and forecast for 2023
At the end of each year, I try to make a prediction about what will happen in the world economy in the coming year. Of course, forecasts are riddled with errors, given the many variables involved in driving economies. Weather predictions are still difficult to make, and here meteorologists are dealing with physical events rather than (at least directly) human actions. However, weather forecasts up to three days in advance are now quite accurate. And predictions of long-term climate change have been largely confirmed in recent decades. Therefore, if we consider that economics is a science (albeit a social science), which I do, then making predictions is part of testing theories and proofs in economics as well.
How did the predictions I made last year for 2022 work out? In 2022, the world economy is expected to grow by around 3,5-4,0% in real terms – a significant reduction compared to 2021 (minus 25% compared to that year's rate). In fact, 2022 looks to be worse than this consensus forecast, at just 3,2%. Advanced capitalist economies were expected to grow by less than 4% in 2022 – now it looks like these economies will only manage 2,4%. So-called emerging economies should see an average increase of 4% in 2022 – again, a bit too optimistic, with the likely outcome being 3,7%. So major economies have done much worse than they did in 2021 – and worse than consensus predictions. Indeed, the drop in growth in 2022 compared to 2021 was one of the deepest on record.
My own real GDP growth forecast for 2022 was also very high. But at least I recognized why there would be a significant pullback. Last year I argued that “the 'sugar rush' of repressed consumer spending, generated by Covid-19 cash subsidies from government fiscal spending and huge injections of credit money by central banks, was over.” This was half true. As we know, in mid-2022, central banks were involved in a series of interest rate hikes that dramatically raised the cost of borrowing for consumers and businesses. The reversal from monetary easing (QE) to monetary tightening (QT) was swift and sharp due to the rapid increase in inflation rates for the prices of goods, commodities and services worldwide.
I have discussed the reasons for the spike in inflation and the reaction of central banks in many publications this year. Weak low-productivity economies, blockages of global supply chains due to Covid-19 and the energy crisis, reinforced by the Russia-Ukraine conflict, were the drivers of inflation – not “excessive demand”, as Keynesians argued; or excess of “cheap money”, as the monetarists argued. As a result, central banks were powerless to stop inflation, except by destroying incomes, raising debt costs and thus intensifying the likelihood of a true slump in major economies in 2023.
In fact, last year I expected a global debt crisis to reach its peak: “Such was the scale of corporate debt and the sheer number of so-called 'zombie companies' that they weren't even making enough profits to cover servicing. of its debts (despite the very low interest rates), that a financial collapse could ensue”. This has yet to happen in advanced capitalist economies, in part because of inflation which has reduced the “real” burden of borrowing costs. The global debt-GDP ratio will reach 352% by the end of 2022, according to the latest Global Debt Monitor do Institute of International Finance (IIF) based in Washington. This includes financial sector debt, which is normally incurred within the sector itself. Excluding that, global debt is over 250% of world GDP, according to the BIS.
But, as I predicted, the so-called emerging economies are facing a major credit crunch – with debt defaults already happening in Sri Lanka, Zambia, Ghana and others, such as Egypt and Pakistan, on the brink of the abyss. A very strong dollar by 2022 has made debt service in dollars virtually impossible for many of the poorest countries. According to the BIS, there are around $65 trillion in debt owed by non-bank institutions in emerging economies. Around half of Low Income Economies (LIEs) are now at risk of debt default. “Emerging market” debt to GDP increased from 40% to 60% in this crisis. There is little room to increase government spending and alleviate the impact.
The world's poorest countries are expected to pay 35% more interest on their debt this year to cover the additional cost of the Covid-19 pandemic and there is a dramatic increase in the price of food imports, according to a report of the World Bank. Latin America faces a “protracted crisis” in the wake of the pandemic. A UN report on Latin America and the Caribbean warns that nearly 45% of young people live below the poverty line. The Economic Commission for Latin America and the Caribbean (ECLAC) report concluded that 56,5 million people in the region were affected by hunger. An estimated 45,4% of people aged 18 and under in Latin America lived in poverty.
Contrast this with the huge profits made by energy producers in 2022. The profits of the seven largest oil companies rose to nearly $175 billion.
I said in my 2022 forecast that “this year could be the year of a financial meltdown or at least a severe correction in stock market and bond prices as interest rates rise, eventually taking a layer of bankrupt zombie corporations”. Well, we haven't had the crash and bankruptcies yet, but we have had the severe correction in the financial markets. Equity and bond markets in major economies collapsed in line with the sharp reduction in growth and rising interest rates.
There have been two notable casualties of this credit and liquidity squeeze: the death of cryptocurrencies; and the sharp drop in stock prices of such heroes of “tech” speculation as Tesla and Meta. 2022 was the year of cryptocatastrophe. More than 2 trillion in notional value has disappeared into thin air as the total market capitalization of crypto tokens has plunged 70% from its peak in November 2021.
Starting with the Tether scandal and ending with Sam Bankman-Fried's FTX empire, with his arrest on criminal charges, the craze for Ponzi cryptocurrency investment schemes has been exposed. Speculation is inherent to capitalism, but it increases, like other financial activities, in times of economic malaise and crises, that is, when profitability drops in the productive sectors and capital migrates to unproductive and financial sectors where the rate of profit it is higher. This is the reason for the emergence and rise of the crypto market. What this market downturn shows now is what happens when investors start to expect a decrease in profits from an impending downturn and even recession in the “real” economy.
And then there's Tesla and its monster head, Elon Musk. The soaring share price of this seemingly world leader in electric cars has made Musk the richest billionaire in the world. But his troubled buyout of Twitter and Tesla's significant drop in production and sales wiped out nearly half of his paper wealth. Tesla was worth $1,2 trillion in market cap in early 2022, but now Tesla's value has dropped to $400 billion, a drop equivalent to the combined current market capitalization of more than 80 of the smallest companies in the S&P index. 500.
In my forecast for 2022, I considered that “the current high inflation rates are likely to be 'transient' because in 2022 output, investment and productivity growth will likely start to fall back to 'long depression' rates. This will mean that inflation will also decline, although it will still be higher than pre-pandemic.” This was written before the energy crisis really set in and the conflict in Ukraine started. Thus, inflation rates did not decrease in 2022 and, on the contrary, continued to rise until reaching peaks in November. This didn't seem to be so "transient".
But global inflation rates are now starting to decline, as energy and food price increases slow (although they remain at the highest levels). Having reached more than 7% on average in 2022, global inflation could fall below 5% in 2023 – if it is still much higher than the average of more than 3% in the 2010s. will be “transient” in 2023 (but still higher than in the pre-pandemic), even because the world economy is entering a new recession just three years after the pandemic recession, which was the deepest and widest in impact on the history of capitalism (about 200 years!).
Never before has an imminent recession been so widely anticipated. Maybe that means it won't happen – given the track record of major economic forecasts! But this time, the consensus appears to be correct. Of course, there are some analysts in the US who continue to argue that the US economy, with its tight job market, is slowing down inflation and the strong dollar will prevent a slump. But that's not what all international forecasting agencies think.
Let's take the IMF first. He reckons global real GDP growth will be just 2,7% in 2023. This is not officially a recession in 2023 – “but it will feel like one”. US growth will slow to 1%; the UK to 0,5% along with the Eurozone, while Germany will enter recession at -0,3%. "Risks in forecasts remain exceptionally large and to the downside." And the IMF forecast is the most optimistic. The OECD estimates that global growth will slow to 2,2% next year. “The global economy is facing significant challenges. Growth has lost steam, high inflation has spread across countries and products, and is proving to be persistent. The risks lean to the downside.” Then UNCTAD, in its latest report on trade and development, also projects that world economic growth will decline to 2,2% in 2023. “A global slowdown would leave real GDP still below its pre-pandemic trend, costing the world more than $17 trillion – close to 20% of income. worldwide”.
The World Trade Organization (WTO) joins other international agencies in predicting a global slump. “World trade in goods is expected to decline sharply next year under the weight of high energy prices, rising interest rates and war-related disruptions, increasing the risk of a global recession,” according to the WTO. Its forecast for global economic growth in 2023 is 2,3% and the WTO warns of an even sharper slowdown if central banks raise interest rates too sharply in their efforts to contain high inflation.
A leading private sector, the Peterson Institute predicts recession for the Eurozone, the US, the UK and Brazil next year, with world economic growth falling to a low of 1,8%. And the Institute of International Finance (IIF), a research body funded by leading international financial institutions, predicts an even sharper drop in global growth in the coming year. “We predict a global recession in 2023. Adjusted for base effects – probably around +0,3% next year (green) – global growth will be just +1,3%. This is as weak as in 2009, when global growth was lower (+0,6%) but cumulative losses were -0,7% (yellow). Another 'Great Recession'”.
So it looks like major analysts are in agreement – a dip is coming in 2023, even if they hedge their bets on how deep and in which regions. However, some leading economists reject this recession prediction on the grounds that the world economy will still grow in 2023. “While the Organization for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) expect growth global economy sinks to 2,2–2,7 in 2023 from 6,1% in 2021, which still makes it unlikely that the world economy will shrink for consecutive quarters”. (Jeffrey Frankel). But remember, if global real GDP grows by around 2% next year (that is, for a world economy that includes the fast-growing US, India and Indonesia and a China recovering from Covid lockdowns -19), this means that per capita GDP growth will be just 1%, a rate as low as in the Great Recession of 2008-9.
Can the US escape a recession? In December, US business activity was contracting at its fastest pace since the magnitude of the 2020 pandemic. The US composite PMI, which tracks business activity, fell from 46,4 in November to 44,6 in December – anything below 50 means contraction and the lower the number the faster the decline. This is a clear sign that the US economy is headed for a downturn in 2023. JP Morgan economists report that their global industrial production index fell in November "to a level rarely seen outside of recessions". This points to a hard landing in global factory production in 2023.
The ECB now considers that the Eurozone economy is already in recession, with production contracting in this quarter and in the 1st quarter of 2023. But it expects the recession to be “relatively short and reduced”. Even if that were the case – and I doubt it – Eurozone real GDP growth is forecast to be just 0,5% next year and annual growth will remain below 2% per year for the foreseeable future.
Whether major economies collapse in 2023, or just keep from doing so, is simply a matter for economists to debate. In either case, there are serious consequences for the livelihoods of millions in the Global North and billions in the Global South. O Financial Times summed it up well. “As we come to the end of the year, it's hard to argue that 2022 was a good year for workers. Labor shortages have persisted and wages have risen sharply in some countries such as the US and UK. But payments have not kept pace with rising prices. As a result, global wages have fallen in real terms this year for the first time since comparable records began, according to the International Labor Organization. Work's share of global income has also declined, according to ILO calculations, as productivity growth has outpaced wage growth by the largest margin since 1999. In the UK, a decade of stagnant wage growth before the pandemic is about to end. be followed by the steepest fall in households' living standards in six decades, according to official forecasts”.
In the US, the average decline in real wages was just over 2% year-on-year in the third quarter of 2022. In Europe, Germany and Spain saw even more pronounced declines in purchasing power, with real income falling slightly more of 4% and 5%, respectively, at the national level. Real wages in the Eurozone have fallen by 8% since the end of the pandemic slump in 2020. In Germany, real income has declined by 5,7% over the last year, the biggest real wage loss since statistics began.
The question to be asked is why major economies are slipping back into a new recession after so little time since the Covid-19 crash. In previous publications, I highlighted two factors (two “scissors” blades that are about to close and cut production and investment). Both factors are dampening and even reducing profits, and the rising cost of debt service is at record highs.
As I have demonstrated in previous publications in some detail, contrary to what leading politicians, central bankers and economists claim, there is no spiral of “price wages”. Wages are not driving prices up. In fact, it was earnings that rose sharply as a share in value since the pandemic. But as we approach the end of 2022, low productivity growth, still rising raw material and component prices, and rising unit labor costs are eating into profit margins. The drop in profit margins will eventually lead to lower profitability and even a decrease in the profit mass. And falling profits is the formula for an eventual fall in investment and production.
Productivity growth continues to slow in the US. The third quarter of 2022 saw a -1,4% decline, making it three consecutive quarters of decline, on an annual basis, the first since the deep slump of 1982. So, while wages are rising at just over 3% in compared to US inflation of over 8%, falling productivity is starting to squeeze corporate profits as labor costs per unit of output have risen by more than 6% year-on-year.
In the US, corporate profits fell in the third quarter of 2022, according to the latest data released. Total profits were down 1,1% compared to the previous quarter. In fact, non-financial corporate earnings fell nearly 7% in the quarter. And non-financial corporate earnings fell to 6,4% year-on-year. The earnings contraction has begun as wages, import prices and interest costs are now rising faster than selling prices. Profit margins (per unit of output) have peaked (at a high level), and non-labor unit costs and wage costs per unit are rising as productivity stalls. The post-pandemic profit bonanza is over.
This is a fall scissor blade. The other blade is the rising cost of borrowing. Many companies are saddled with debt and headed for trouble as borrowing costs rise and banks tighten liquidity. Remember the large number of so-called “zombie companies” that don't make enough profits to cover even their debt service commitments; and also the “fallen angels”, the companies that borrowed heavily to invest in risky assets and are now facing bankruptcy. Perhaps the bankruptcies that were delayed in 2022, as inflation spread, will emerge in 2023.
While central banks and governments are loath to admit that a slump is coming, especially in the US, financial investors are not so bloodthirsty. Another strong and reliable sign of an impending recession has been the so-called “inverted bond yield” curve. An inverted bond yield curve is when long-term (10-year) bond yields are lower than short-term (3-month or 1-year) interest rates. I have already explained why this is a good indicator of an upcoming recession in several publications. Currently, the US bond yield curve is actually inverted, which actually predicts a recession. Every other four times this curve has dipped below zero, a short-term recession has followed.
So, for a change, it looks like the consensus will prove correct and the world economy will see a sharp drop in real GDP growth, with many major economies going into recession – with all the dire consequences for the standard of living of many of them. After “the cost of living crisis”, the crisis of living will come.
*michael roberts is an economist. Author, among other books, of The Great Recession: A Marxist View.
Translation: Fernando Lima das Neves.
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