Global economy in trouble
The first month of 2016 witnessed a sharp fall in stock markets all over the world, reflecting the expectation of falling production and profits across a wide range of sectors on the world scale. The price of crude oil in world markets has fallen steeply to below 30 Dollars a barrel, the lowest in 12 years. The decline in oil prices initially began
Global economy in trouble
The first month of 2016 witnessed a sharp fall in stock markets all over the world, reflecting the expectation of falling production and profits across a wide range of sectors on the world scale. The price of crude oil in world markets has fallen steeply to below 30 Dollars a barrel, the lowest in 12 years. The decline in oil prices initially began when the United States started escalating production of shale gas, substituting for imported oil. The decline in demand was further aggravated by the economic slowdown in China and the stagnation and contraction in Europe. The steep fall in oil prices has had a major negative impact on the economies of oil exporting countries, including Russia and Brazil. The fall in prices of primary commodities has led to unemployment and destruction of productive forces in many countries of Asia, Africa and Latin America.
Global economic growth is estimated by the IMF to have been around 3% in 2015, which is slightly lower than the previous year. A further slowdown is in the making. The majority of advanced capitalist economies of Europe and North America are stagnating. Economic growth in the US remains between 2% and 3% annually while it has slowed down in China and India.
The Chief of the International Labour Organization (ILO) recently told journalists, “The global economy is not generating enough jobs”. In a new report, the ILO estimated that 197 million working-age people were unemployed in 2015, a slight increase over the previous year. In 2016, the army of unemployed is expected to grow by a further 2.3 million, and another 1.1 million in 2017. Employment rates have not recovered from the financial crash of 2008. About 27 million more people were out of work last year as compared to the pre-crisis level.
Industrial performance in India has shown some improvement in 2015 but less than the expectations generated by the “Make in India” campaign. Industrial production was stagnant in 2013/14, grew by 2.8% in 2014/15 and by 4.0% during April-Sept 2015. Much of the foreign investment that has come into the country in 2014/15 and 2015/16 so far has been in the old areas of real estate and services including telecom and software, while manufacture of automobiles, chemicals and metals received a mere tenth of the flows. Many FDI deals involve a foreign company buying up an Indian company, leading to destruction of jobs rather than creation.
The average rate of capitalist profit has declined considerably since the Great Recession began in 2008, both in India and on the world scale. The average profit rate in public limited companies, excluding banking and insurance, has declined from 30% to 15% in India between 2005 and 2014; while on the world scale, it declined from 16% to 12% in the same period.
While average profit rates have fallen, various monopoly corporate houses are pocketing much higher than average rates. For instance, Reliance Industries Limited posted a 39% increase in net profits during October-December 2015, compared to the corresponding quarter of the previous year, while Indigo Airlines reported 24% increase in net profits. There is significant variation in profitability across sectors and between the big monopolies and other smaller firms.
Remedies have worsened the situation
Since the Great Recession that began in 2008, various measures taken in the name of dealing with the crisis have paved the way for further disasters. For instance, the US Federal Reserve repeatedly took steps to lower the cost of borrowing for banks and other financial institutions. This was presented as a way to stimulate productive investments. Facts show that it resulted in massive speculation and artificial price bubbles.
In the nineties, when the Fed Funds rate (the rate at which the Federal Reserve lends to commercial banks) was lowered to 6.5%, it resulted in the dot com bubble. When that bubble burst and the US stock market crashed, the Fed responded by further lowering the rate to just 1% in 2003. The result was the bubble in highly risky lending for house construction, which burst and created the so-called “sub-prime mortgage” crisis.
In China the government responded to the crisis in 2008 by stepping up investment in housing and other infrastructure, thereby maintaining a growing demand for building materials as well as for petroleum and other sources of energy. The construction boom ended in 2014, having led to an excess supply of high-end housing. The year 2015 witnessed a sharp slowing down of industrial activity in China, which is further aggravating the lack of aggregate global demand for commodities.
What we are seeing is a severe crisis of capitalism affecting most countries across the globe, the impact of which is being borne largely by the workers, peasants and working people of all the countries.
Developments on the world scale and in India confirm that capitalism is incapable of preventing repeated crises, with the so-called solutions implemented by capitalist governments leading to only further aggravation of the crisis.