The supposed global recovery

Image: Antonio A Costa


Annual average real GDP growth in virtually all major economies is at a slower pace in this decade compared to the 2010s

How is the supposed global recovery going after the “end” of the COVID pandemic? The economic consensus is that major economies are recovering quickly, driven by rising consumer spending and corporate investment.

The problem ahead is not a return to sustained economic growth, but the risk of higher or longer-lasting inflation in the prices of goods and services, which could force central banks and other creditors to raise interest rates. And this can lead to the bankruptcy of heavily indebted companies and then to a new crash financial.

While this risk is clearly present over the next two years, will there really be a sustained recovery in economic growth over the next five years? Let's remember the official forecasts. The IMF estimates that in 2024 global GDP will still be 2,8% below where it thought world GDP would be before the pandemic crisis.

And the relative loss of income is much greater in so-called emerging economies – excluding China, the loss is close to 8% of GDP in Asia and 4-6% in the rest of the Global South. Indeed, forecasts for annual average real GDP growth in virtually all major economies are for lower growth in this decade compared to the 2010s – which I have called the Long Depression.

There seems to be no evidence to justify the assertion of some “mainstream” optimists that the advanced capitalist world is about to experience a roaring 2020s, as the US briefly experienced in the 1920s after the Spanish flu epidemic. .

The big difference between the 1920s and 2020s is that the 1920-21 recession in the US and Europe cleaned up the “rotten part” of inefficient and unprofitable companies so that the stronger survivors could benefit from more participation. in the market. Thus, after 1921, the United States not only recovered, but entered into a (brief) decade of growth and prosperity. During the so-called Roaring Twenties, US real GDP increased by 20% and 42% per year per capita. None of this is being predicted right now.

And the reason is clear from Marxist economic theory. A long boom is only possible if there is significant destruction of capital values, either physically or through devaluation, or both. Joseph Schumpeter, the Austrian economist of the 1920s, following Marx's cue, called this "creative destruction".

By cleaning up the process of accumulating obsolete technology and poor, unprofitable capital, new business innovation could thrive. Schumpeter saw in this process the breaking up of stagnant monopolies and their replacement by smaller innovative firms. In contrast, Marx saw creative destruction as the creation of a higher rate of profitability after the small and weak have been devoured by the large and strong.

It's true that after plunging 35% last year, global corporate profits have seen a big recovery this year and are on track to end the year at least 5% above their pre-pandemic trend. But if correct, that would contrast with the expectation that global real GDP will remain 1,8% below its pre-pandemic trend.

This rise in earnings has spurred some recovery in productive investment (capex), perhaps leading to a 5-10% increase in 2021. But JP Morgan economists think this may be short-lived, as their forecasting tool suggests a drop in investment “despite strong profit growth”.

The large gap between earnings growth and productive investment growth is a key indicator that the 2020s will not be like the 1920s for the US or anywhere else. There are two main reasons: first, continued low profitability (meaning profits relative to total investment in the means of production and labor power); and second, high and rising corporate debt, among others.

To avoid a slump like 1920-21 or 1929-32, in the Great Recession of 2008-9, governments and central banks cut interest rates to zero and, during the COVID slump, contributed to the easy money policy with huge programs of fiscal stimulus. The result is that there has not been a destruction of the corporate “rotten part”. In fact, so-called zombie companies (where profits are not enough to cover borrowing costs) are still around and in increasing numbers.

Rise of zombie companies (BIS data)

I've mentioned the rise of zombies several times in this blog. But there is new evidence to support the effective existence of these barely breathing companies. Two Argentine Marxist economists, Juan Martin Grana and Nicolas Aguina, recently presented an excellent article on zombie companies, entitled A Marxist and Minskyan perspective on zombie companies.[I]

Grana and Aquina empirically show that 1) these zombie companies have increased in number since the 1980s and 2) the cause is not the rising cost or the size of their debt, but simply because these companies have much lower profit rates of production, forcing them to ask for a rollover of their obligations. Therefore, the existence of zombie companies has a cause foreseen by Marxism, not a cause foreseen by Minsky.

In fact, because of the low return on productive capital in most major economies in the first two decades of the XNUMXst century, the profits of productive capital have been increasingly diverted to investment in real estate and financial assets, where “earnings from capital” (profits from increases in stock and property prices), as profits there have been much higher. Over the past two decades, the rise in asset values ​​has come mainly from price increases rather than accumulated savings and investment.

McKinsey (see below) estimates that just under 30% of net worth growth in absolute terms was driven by new investment, while around three-quarters was driven by price increases. This is making money with money and not with exploiting the workforce. So these gains are at the expense of those who sell at a loss; and/or potentially “fictitious”, as eventually the gains will not be realized if the productive sector collapses.

According to a new report from the McKinsey Global Institute, two-thirds of global net worth (that is, the market value of assets minus debt) is stored in real estate and only about 20% in other fixed assets. Asset values ​​(real estate and finance) are now nearly 50% higher than the long-term average relative to annual global revenue. And for every $1 in net new investment, the global economy created nearly $2 in new debt.

Financial assets and liabilities held outside the financial sector grew much faster than GDP, and at an average of 3,7 times cumulative net investment between 2000 and 2020. While the cost of debt has fallen dramatically relative to GDP, thanks to at lower interest rates, high borrowing relative to the value produced “raises questions about financial exposure and how the financial sector allocates capital for investment”.

See the first figure in the appendix

Higher asset prices accounted for about three-quarters of net worth growth between 2000 and 2020, while new investment accounted for just 28%. The value of corporate assets and equity has diverged from GDP and corporate earnings over the past decade. Since 2011, total corporate real assets have grown, on a weighted average, by 61 percentage points relative to GDP in the ten countries. But the corporate profits that underpin these figures have declined by one percentage point relative to GDP at the global level.

McKinsey fears that this rising level of speculation in non-performing assets financed by more debt could become quite unpleasant for capitalists in the future. “We estimate that net worth to GDP could decline by as much as a third if the wealth-to-income ratio were to return to its average during the three decades prior to 2000. Evaluating scenarios that include this reversal of net worth to GDP, a reversal of the land prices and rental incomes to 2000 levels, and a scenario in which building prices have changed in line with GDP since 2000, we find that net worth to GDP per country would decline between 15 and 50 percent in the ten countries in focus.” In other words, a financial and equity collapse.

Now, some mainstream economists have argued that the gap between profitability and investment is misleading because corporations have increasingly invested in what are called “intangibles”. Intangibles are defined variously as investment in intellectual property rights for software, advertising and branding, marketing research, organizational capital and training. These investments don't cost as much as investing in factories, offices, facilities, machines, etc. (that is, in tangible assets) and still provide much more profit and productivity. At least, that's what the argument says.

Over the past 25 years, McKinsey found that the share of intangibles in total corporate investment growth was 29% compared to just 13% for tangibles. The OECD reported in 2015 that intangible assets had expected returns of 24 percent, the highest rate among produced asset categories.

But here's the problem. Despite the fact that digital commerce and information flows have grown exponentially over the past 20 years, intangibles still make up just 4% of net worth. They are not critical to generating greater investment among companies in major economies. Fixed assets and inventories are six times larger.

See second figure in the appendix

Even so, what matters is the investment in tangible productive assets. As McKinsey states: “Our analysis confirms that gross operating surpluses, which is the value generated by a company's operating activities after wages are subtracted, increase along with a growing pool of produced assets, which are assets resulting from production, including machinery and equipment and infrastructure, as well as inventories and valuables”. The greater the value of the assets produced, the more each worker in an economy contributes to GDP, i.e., greater labor productivity.

See Third figure in the appendix

But the profitability of tangible productive assets has been falling. So, as McKinsey puts it: “If a company invests, say, $1 million in new machines, will the value of running those machines to produce a widget outweigh the value of the land under the factory where the machines are? If an individual invests in a rental property, are improvements to the property to raise the rent worth it compared to simply waiting for the market price to appreciate?” For that reason alone, a roaring 2020s is not likely.

*michael roberts is an economist. Author, among other books, of The Great Recession: A Marxist View.

Translation: Eleutério FS Prado.

Originally published on the website The next recession blog.


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[I]See this recording on YouTube from 22,36 to 42,30.

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