Fears grow that US headed into new recession

Fears that the US economy is sliding into a new recession or into a period of protracted near stagnation have been heightened by new data released at the end of August. Real US gross domestic product (GDP) increased at a sluggish annualised 1.6% rate in the April-June quarter of 2010 after increasing by 3.7% in the first quarter, the US Commerce Department announced on August 27. A month earlier the department had estimated US GDP growth in the second quarter would be 2.4%.

The US is the world’s largest national economy, accounting for a quarter of gross world product. The second quarter was marked by a big jump in US business spending as companies replenished equipment they hadn’t replaced during the “Great Recession” of 2008-09, with business fixed investment rising 17.6%. Analysing the newly released data the MarketWatch website observed that, “Contributing to the slowdown from the first quarter was the country’s trade ledger: Exports rose 9.1%, but imports grew a startling 32.4% — the biggest jump since the first quarter of 1984. Imports took away 4.45 percentage points from GDP in the second quarter. The imports surge came as American consumers loaded up on foreign-made goods like pharmaceuticals, televisions and furniture …

“[But] economists aren’t expecting much from the US consumer in the second half. Excluding gasoline and car sales, retail sales fell 0.1% in July. Worryingly high unemployment, tight credit and a moribund housing market are holding back the consumer, as is an increasing propensity to save: The savings rate climbed to 6.1% in the second quarter from 5.5% in the first quarter.”

Commenting on the new data in the August 28 New York Times, Peter Goodman, a national economic writer for the paper’s business section, wrote: “Despite an aggressive regimen of treatments from the conventional to the exotic — more than [US]$800 billion in federal [stimulus] spending, and trillions of dollars worth of credit from the Federal Reserve — fears of a second recession are growing … a sense has taken hold that government policy makers cannot deliver meaningful intervention. That is because nearly any proposed curative could risk adding to the national debt — a political nonstarter …

“It increasingly seems as if the policy makers attending like physicians to the American economy are peering into their medical kits and coming up empty, their arsenal of pharmaceuticals largely exhausted … The growing impression of a weakening economy combined with a dearth of policy options has reinvigorated concerns that the United States risks sinking into the sort of economic stagnation that captured Japan during its so-called Lost Decade in the 1990s. Then, as now, trouble began when a speculative real estate frenzy ended, leaving banks awash in debts they preferred not to recognize and hoping that bad loans would turn good (or at least be forgotten).”

2008-09 recession

The “Great Recession” which began in the US in December 2007 and dragged the rest of the world economy into its most severe downturn since the 1930s Great Depression, led to the near meltdown of the US financial system in September 2008 and the subsequent “Global Financial Crisis”. During 2008 real US GDP contracted by 2.73% and by 5.6% in the first half of 2009.

The Japanese economy — which was the world’s second largest national economy, accounting for 9% of world gross product in 2007, contracted by 1.08% in 2008 and by 0.3% in 2009. Japan’s GDP expanded at 1% in the first quarter of 2010, but it slowed to an anemic annualised growth rate of 0.4% in the April-June quarter.

The total GDP of the 27-member country European Union - which accounted for 28% of gross world product in 2007 — grew by only 0.9% in 2008 and then contracted by 4.08% in 2009, with its largest national economy (Germany) contracting by 4.97%. During the first quarter of 2010 total EU GDP grew by 0.2%. The official Eurostat initial estimate, released on August 13, for second quarter EU GDP growth was 1%. While German GDP grew 2.2%, German business journal Handelsblatt warned on August 25 that the “export-driven German juggernaut is bound to lose steam if its major foreign markets can’t keep up. And wherever German exporters look, the prospects for their key markets are already dimming. The latest Ifo World Economic Climate index shows a slump in North America and Asia. And the growth reported for Western Europe simply reflects Germany’s good showing, which masks the actual plight of its neighbours.”

The journal noted that “the US, in spite of the historic stimulus package, has yet to see a sufficiently stable upturn to create enough new jobs. The jobless rate is still hovering around 10 per cent, which casts a damp over consumption, the driving force behind the US economy … And throughout Europe the stimulus programmes will be winding down over the next few months — giving way in some cases to draconian austerity programmes, which have already driven Greece, for example, back into a recession …

“So in all likelihood, the export engine that drives the German economy will be shifting down a gear or two over the next couple quarters. ‘Given the worsening situation internationally and especially in the euro area, the economic dynamic is likely to slow down noticeably again come autumn’, forecasts Gustav Horn, head of the IMK economic research institute.”

Greek austerity measures

The draconian austerity measures imposed on Greece’s working people — a 4% hike in sales taxes and a 12% cut in pensions and cuts in public-sector wages of up to 20% have amounted to about US$28 billion (8% of GDP) so far this year. These measures, implemented by Greece’s social-democratic PASOK government, as the Handelsblatt journal noted, have plunged the country back into recession. PASOK is committed to slashing the budget deficit from 13.6% of GDP to under 3% by 2014. Greece’s economy has now contracted for seven quarters. Between April and June this year, its GDP shrank by 1.5%, the Hellenic Statistical Authority announced on August 12. The official unemployment rate is now 12% (up from 8.5% in May), and the economy is expected to shrink 4% over the whole year.

The Greek trade unions have called six one-day general strikes in seven months to protest against the PASOK government’s austerity measures. The most sustained protest against these measures — a six-day strike by 33,000 truck drivers that began on July 26 was broken by the government’s enacting of emergency legislation. This required the drivers to return to work immediately or face having their trucks requisitioned and being imprisoned for up to five years.

When the trick drivers ignored the order, the PASOK government mobilised the army to break the drivers’ strike, using military vehicles to supply fuel to airports, hospitals and power stations. Neither the private-sector General Confederation of Greek Workers (GSEE) nor the public sector Civil Servants’ Confederation (ADEDY), which together represent several million workers but which are led by pro-PASOK officials, organised a single strike or protest in support of the truck drivers.