Sounds of crisis in the world economy

Between the last week of September and the first week of October the signs of a new crash in the world economy have increased. The reports about the fall of manufacture production in the United States, Europe and Japan are joined by the liquidity issues in the big banks of the US; the forecast of an abrupt fall in the perspectives of economic growth of the WTO for 2019 to half of the previous forecast; the authorisation of this institution, that controls international trade, for the application of new tariffs by Washington on Europe, therefore broadening the commercial war; Trump´s threat, weeks before a new round of negotiations with China, of expelling Chinese companies from Wall Street, and the October 1 fall of the world´s main stock markets, greater in volume and impact to the previous two falls of the first days of September. This data itself is enough to justify the so-called “panic of the markets”, as some media outlets have branded it. And the beginning of Donald Trump´s  impeachment adds a greater quota of political uncertainty to this complex economic situation.

The Federal Reserve to the rescue of the banks

Crossed by a sour debate about continuing or stopping the reduction of reference interest rates, between September 17 and 24 the US Federal Reserve was in need of injecting liquidity to the banks on a daily basis. These injections went from 53.000 million on the 17th to 105.000 million on the 24th, with rates that the FED placed between 1,75% – 2% on the 18th while, if the banks had to rely on the credit market or the “bank in the shadow”, they would have paid no less than 10%, which they would not have been able to cover.

What is important about these operations is that they have not been carried out in approximately 10 years. They began in September of 2008 when, after the fall of Lehman Brothers, the US and European banking systems had to resort to central banks for the subprime crisis to not drag a great part of the entire global banking system down with it.

But because this liquidity obtained by the banks at very low interest rates is not used to stimulate the production, but to invest in speculation, generating new bubbles or inflating ever more the ones that already existing, which will explode sooner or later.

Global recession in manufacture

According to official reports of the third trimester, manufacture was on the low in both the United States and Germany. In October the PMI index of surveys of the main corporation´s decision makers was published, in which the global recession can be seen.

This recession is already a fact in the G7 countries, but not only there. Production is also falling in Russia, Singapore, South Africa and Mexico to name a few countries from a longer list. Meanwhile, in China and India, where there still is economic growth, it is the lowest of the last 10 years.

Those who now feel the impact of this slowdown, developing since 2018, are Argentina and Turkey, that despite their situations, which are more serious than the rest, are not isolated cases.

In addition to the national peculiarities that mark the rhythm of this advance in the crisis, there is a development in the commercial war between the two main economies of the planet and a slowdown of productive investment in the main capitalist economies. These processes have no end in sight. They are conditioned by a base of a secular fall of the profitability of capital and by a scenario of growing social struggles and political uncertainty.

The trade war is spreading

While announcing a new measure for the evolution of world trade, adjusted to half of its previous forecast, the WTO authorized an order from the United States to increase tariffs on new products imported from Europe. Another 7.5 billion Euros in products, thus expanding the tariffs that had already been imposed on steel and other goods in 2018.

Although the authorization of the WTO is limited to the aviation industry, especially to the Airbuses produced in Europe, the United States has already announced that it could spread that measure to other products as diverse as whiskey, cheese and tools, for example.

But analysts also fear that the meeting scheduled for October in Washington between US and Chinese officials on the trade and technological war, does not mean an advance toward solving the conflict, nor causing relief in the prospect of a crisis in the world economy. On the contrary, Trump has already announced that the expulsion of all Chinese companies from the US stock market is being studied by his government, which caused a sharp fall in Chinese shares listed there.

On the other hand, on October 3 the decreasing evolution of the services sector in the United States was made public. This sector had been supporting the weak growth of the North American and European economy, while manufacture fell to recession levels. If this data, the lowest in the last three years, deepens in the following months, it will reveal the beginning of a new global recession.

The beginning of Donald Trump´s impeachment by the US Congress takes place amid this deep uncertainty. This situation raises as an imminent possibility that the decreasing wave of the productive economy, because it has repercussions in the financial sector, ends up in a new crisis of the world economy.

Carlos Carcione