Is the world economy on the verge of a new recession?

There is general agreement among capitalist economists that the world economy is now at risk of a recession, potentially as bad as the global financial crisis of 2008-09, the worst economic downturn since the Great Depression. In its November 2019 Economic Outlook, the Organisation of Economic Cooperation and Development (OECD) stated that:

The global outlook is fragile, with increasing signs that the cyclical downturn is becoming entrenched. GDP growth remains weak, with a slowdown in almost all economies this year, and global trade is stagnating.[1]

The purpose of this article is to outline some of the main features of this downturn but to situate it in the context of Marx’s theory of economic crisis. Capitalism, Marx argued, is a system wracked by recurrent booms and busts, a never-ending cycle of economic advance followed by sharp contraction.[2] During the booms, businesses prosper, hire more workers and invest more. During the busts, the whole system goes into reverse, investment dries up, and the bosses try to restore their fortunes by cutting wages and sacking workers. But, Marx contended, the dynamism of the entire capitalist system tends to weaken over time as a result of the long term tendency for the rate of profit to fall. This tendency can be offset for a period by a series of countervailing factors but inevitably reasserts itself at some point. Profits are the fuel that drives the capitalist economy. When the rate of profit is depressed, the economy starts to sputter and malfunction: the upturns in the economic cycle become weaker and the downturns more severe. It is these two factors – a downswing in the current phase of the economic cycle exacerbated by the long term weakening of the rate of profit – that explain the crisis in the world economy today.

Overview of the global economy

There is ample evidence of the current downswing in the global economy (Figure 1).

Figure 1: Overview of the global economy[3]

A close up of a map Description automatically generated

The situation varies from country to country, but the overall trend is uniform.[4] Growth in the Euro area, already feeble at 1.9 percent in 2018, is projected at just 1.2 percent for 2019. In Britain growth last year fell to 1 percent, and even that may be optimistic if Brexit hits hard in coming months. Japan is crawling along at 1 percent. The US is the relative outlier among the G7, but even here growth is down from 2.9 percent in 2018 to 2.3 percent in 2019: in 2020, the OECD is predicting US growth of just 2.0 percent.

Growth is also slowing outside the advanced economies. In China, growth in 2019 came in at 6.2 percent, the lowest since 1992, with the OECD forecasting growth of just 5.5 percent by 2021. Growth in India in 2019 was also down to 5.8 percent, from a peak of 9 percent in 2016. And then there are the real danger zones. Brazil, which suffered a severe contraction four years ago, saw its economy grow by less than 1 percent in 2019. In Mexico, the economy flat-lined, as did Turkey’s. Russia registered growth of less than 1 percent last year, while the Argentinian economy has shrunk by 5.5 percent in the past two years. These are the so-called emerging economies which just a few years ago were held up as the bright spots in the world economy.

Several factors are responsible for the downswing. Global investment is forecast to rise by less than 1 percent in 2019, down from 5 percent at the start of 2018. World trade is anaemic and there is no sign that it will pick up soon. The only thing holding the US economy up is household spending, but with the effect of Trump’s tax cuts beginning to wear off and with recession fears rising there is no guarantee this can be sustained. The OECD chief economist warns that unless action is taken “we run the risk of finding ourselves stuck in a long period of low growth”.[5]

The downswing is not being felt evenly. The situation is worst in manufacturing. Industrial production in the advanced economies actually shrank in the first half of 2019 and future indicators are at their weakest for seven years. In the service sectors, things are not so grim. But the two sectors are intertwined and it’s unlikely that services can remain buoyant with manufacturing in the doldrums.

And so, after three years of tentatively pushing up interest rates to try to damp down runaway increases in the price of shares and a surge in corporate borrowing, the Federal Reserve Bank is now dropping interest rates again to try to lift the US economy, while the European Central Bank (ECB) has set a cash rate of negative 0.5 percent for the 19 members of the Eurozone. All around the world, central banks are moving in the same direction.

Why the recessionary threat? Most accounts of the slowdown of the world economy point to the US-China trade war as an important factor. Average tariffs on trade between the two countries grew from low single figures in 2017 to 21 percent by the end of 2019.[6] Monthly trade between the two countries in 2019 was more than 10 percent lower than in the equivalent month in 2018. The uncertain state of trade negotiations between the US and China means there can be no guarantees that higher tariffs will not be consolidated rather than wound back.[7] And while China is less able to inflict pain on the US with its tariffs, since it exports far more to the US than it imports, the Chinese government has allowed the renminbi to slide in the last 18 months to offset the effect of US tariffs.

Trade tensions are also blowing up with Europe, with the Trump administration threatening tariffs on European consumer goods in response to the EU’s attempt to eliminate tax breaks for US IT companies and the World Trade Organization (WTO) finding that the EU continues to subsidise Airbus in its battle with Boeing. Trump is also mooting tariffs on Brazilian and Argentinian metals, accusing the two countries of currency manipulation. Within the EU, there remains the uncertain effect of Brexit, which will affect not just the British economy but trade relations across the bloc.

Why is this trade uncertainty important? It’s not just the impact on flows of trade, but the wider effect of the breakdown in trade relations that matters: disruptions to trade are threatening cross-border investment plans and supply chains. Businesses are simply stalling their investments until they can be sure what the outcome with tariffs is going to be.

There is no doubt that the trade war between the US and its chief trading partners and the risk of a hard Brexit are having a dampening effect on the world economy and could be the trigger for a sharper economic slowdown. But the trade conflicts are just an indication of more profound underlying problems.

Growth in the Western economies since the recovery from the GFC has been feeble. The US, the most successful advanced economy, has grown at an annual rate of just 2.3 percent since 2010, far more slowly than in other previous recoveries. Across the OECD, we see weak investment and therefore slow productivity growth, what British economist Michael Roberts refers to as “the Long Depression”.[8]

Why sluggish growth since the GFC?

In order to understand the slow recovery from the GFC, we have to go to the roots of the GFC itself.[9] Neoliberalism – a ruling class program to undermine the wages, living conditions and collective organisations of the working class and redistribute income and wealth to the capitalist class – was the capitalist response to the economic crisis of the 1970s. But it failed to solve the underlying problems that gave rise to that earlier crisis, in particular a low rate of profit. Corporate profitability in the US did rise in the 1980s and 1990s, peaking in 1997, but never recovered to the rates that undergirded the post-war boom, the longest sustained expansion of the world economy in history. In other advanced economies at this time, the rate of profit barely moved.[10] The fact that even in the middle of a sustained capitalist offensive against the working class, the capitalists could not fully restore the rate of profit confirmed Marx’s argument about the long term tendency for the rate of profit to fall: Marx did not argue that the rate would fall year after year, only that over a period, which could extend over many years, the tendency would assert itself.

One of the reasons why neoliberalism did not spark off another boom on the lines of the post-war expansion can be found in the changing structure of capitalism itself. Marx argued that one of the most important ways in which the rate of profit could be restored for a period was through the working-out of crisis itself. Crises wiped out inefficient capitalists and devalued constant capital – the machinery, the factories, the railways, the raw materials. Those capitalists that survived the purging effect of the crisis could take advantage of the cheaper means of production now available and the reallocation of capital away from their more inefficient, now bankrupt, rivals. The rate of profit could revive for a period on that basis. However, as capitalism has aged, it has become more monopolistic, the blocs of capital have grown in size. In addition, the blocs have become more intertwined. Governments have been very reluctant to see their national champions go bust for fear of falling behind in imperialist competition and out of concern that the bankruptcy of one big company will have knock-on effects, causing multiple collapses. While bailouts avoided the kind of catastrophic business failures of the nineteenth century, by propping up inefficient businesses, governments have prevented the purging effect of crisis – what economists call “deleveraging” – from working its way through. The Western economies as a result remain weighed down by inefficient capitalists, preventing capital flowing into more dynamic sectors with higher rates of return.

The failure of the rate of profit in productive industry to lift significantly (or at all in many cases) during the neoliberal heyday led to increasing diversion of capital to the financial sector. One outcome was the increased frequency and severity of financial busts. The dotcom boom of the late 1990s collapsed in 1999 and it was only by slashing interest rates that the Federal Reserve Bank was able to prevent a sharp economic downturn in the US. But by doing so, the Fed only kicked the can down the road. Low interest rates sparked off the US housing boom in the early 2000s, but that only created more problems.

The GFC hit in 2008 when the accumulation of fictitious capital in the US, in particular in housing, was brought back into line with the production of real value which had lagged behind the growth of fictitious capital. The result was a sharp fall in house prices, the collapse of the enormous pyramid of mortgage-backed credit derivatives, bankruptcies in some of the world’s biggest financial institutions and a stock market crash.

The austerity measures subsequently unleashed against the working class helped to depress wages. The bank bailouts prevented an avalanche of bankruptcies, while stimulus measures and the flooding of international markets with cheap money (quantitative easing) helped to put a floor under business.[11] The rapid recovery of growth in China after 2009, thanks to a massive stimulus package, pulled up many countries in Latin America, Europe, Africa and Asia, not least Australia. And so, starting in 2010, the recovery took hold.

The recovery had a particular character. Its benefits overwhelmingly went to the well-off, and this is most clear in the US where income inequality in 2018 reached the highest level since figures were first compiled in the 1960s. The share of wealth going to the top 10 percent of households rose to 75 percent, with the bottom half holding just 2 percent.[12] While employment grew by 20 million and unemployment more than halved after the GFC, as a share of the population, there are still fewer people in work or looking for work today in the US than there were on the eve of the GFC in 2007.[13] And while wages for private sector workers are now 11 percent higher than they were in the depths of the GFC, they are still lower than in the early 1970s. The huge expansion of the US economy over the past five decades has done nothing to lift working class living standards.[14]

Very significantly, the mass of corporate profits in the US has risen in the recovery since 2010 but still not by enough to drive up the rate of profit to the level where it would stimulate a new economic boom. Just as during the 1980s and 1990s, the deleveraging process, the bankrupting of inefficient capitalists and the liquidation of private and public debt, which in Marx’s day would have lifted the rate of profit in the productive sector, has not occurred to the degree required to put a bounce back into the rate of profit; quite the opposite, as we shall see. The result is weak investment and slow productivity growth. Instead of investing in productive, value-creating industry, companies have simply borrowed money to buy their own shares in order to drive up their share price, to make them more attractive to investors: the S&P 500 stock market index more than tripled in value between January 2009 and December 2019. And it is not just the price of shares: the price of paper assets of all kinds has soared as a result of the decision by central banks to keep interest rates very low. This, like the dotcom boom of the late 1990s or the US housing bubble of the early 2000s, is not sustainable.

One new feature of the post-GFC recovery which distinguishes it from the preceding quarter century, is that it has not seen any resumption of globalisation. In the decades prior, world trade consistently outstripped economic growth as burgeoning trade in goods and services and international investments (cross border production chains; mergers and takeovers) helped to integrate national economies. During the GFC, however, world trade shrank dramatically, sending the process into reverse. This has had long term effects. In the decade since the GFC, trade has recovered but more slowly than GDP. The world economy is far more globally integrated than at the beginning of the neoliberal era but in the past few years international trade and investment have no longer been important drivers of growth. The current trade wars and the tendency towards decoupling of the US and Chinese information technology sectors will only exacerbate the slowdown.[15] About the only element of international capitalism that has accelerated in recent years has been the siphoning off of company profits to tax havens such as Luxembourg and the Cayman Islands.

The uneven recovery in the decade following the GFC, with the Chinese economy rising from one-third the size of the US’s to two-thirds, is another indication of the reordering of the world economy.[16] China’s growing economic power has had significant political effects which I will return to later.

Finally, the fact that the “solution” to the GFC involved bailing out the banks and shovelling money into the hands of the wealthy (those who hold the big majority of paper assets), while squeezing the working class through harsh austerity, only increased inequality in income and wealth in the G20. Resentment at this fact has had enormous political consequences, and I will also return to this later.

Recession then and now

Any new economic bust will not be a straight re-run of the GFC. For example, it is unlikely to be triggered by economic shocks in the US. Europe or China is more likely to be the source of problems. A housing downturn, which was the spark for multiple shocks in the financial system in 2008, is not set to be the catalyst this time around. Much more likely is the accumulation of corporate debt and government debt. Between 2007 and 2017, total global debt rose from $97 trillion to $169 trillion (in constant 2017 prices). Household debt rose by 11 percent to $43 trillion, but the biggest components were corporate debt, up by 29 percent to $66 trillion, and government debt, up by 31 percent to $60 trillion.[17]

Corporate debt takes two main forms: loans and bonds. Since the GFC, with banks having to rein in their commercial lending to meet tighter financial regulation, the biggest growth in corporate debt has been in the form of corporate bonds, in 2017 valued at $12 trillion. These bonds are booked as collateral or assets on the balance sheets of the banks and investment funds that buy them, attracted by the higher yields than they can get from buying government bonds. The problem is that a lot of the companies that issue these bonds have sub-standard credit ratings, just one step above junk bond status. This is particularly the case in the developing countries where bond issuance has been especially rapid in the last decade: 20-25 percent of corporate bonds in Brazil, China and India are at higher risk of default and in the event of financial or economic shocks, the figure could rise to 30-40 percent. The creditors holding these bonds could end up holding worthless pieces of paper, shredding the value of their booked assets, potentially bankrupting them or at least forcing them to call in loans, sparking off a broader financial crisis.

And then there is government debt. When governments stepped in to bail out failing companies during the GFC they simply transferred their bad debts onto government balance sheets. Stimulus programs also added to the columns of red ink. The result is that, relative to GDP, government debt in the biggest economies is twice as high as it was ten years ago and a record level in peacetime.[18]

Both corporate debt and government debt are vulnerable to any increase in interest rates: if rates rise, the debt burden weighing on businesses and governments could become unsustainable, potentially triggering off insolvencies, stock market falls and investor strikes. Obviously this is speculation, but these concerns are held by the IMF, OECD and World Bank.

The big international financial institutions prescribe three measures for governments and central banks to draw the world economy back from recession:

  • Maintain low interest rates to encourage more business investment and consumer spending (monetary policy)
  • More government borrowing to spend on infrastructure (fiscal policy)
  • More deregulation of product and labour markets, more government funding of new industries, what the OECD calls “reforms to promote innovation”.

These are unlikely to do much to restore growth.[19] In the US, the central bank rate was zero between 2008 and 2015 but this failed to spark significant investment in industry. All it did was fuel inflation in the price of financial assets. Why would low interest rates work to lift the real economy now? Capitalists invest in the expectation of making a return on their investments: if the rate of profit is insufficiently attractive, why borrow money to invest?[20] And with the Federal Reserve cash rate just 2 percent and the ECB’s minus 0.5 percent, there is very little room for central banks to cut interest rates much further in the hope of stimulating investment and consumer spending. Low interest rates may prop up the price of financial assets for a while longer, but this will only make any market “correction” more destructive when it does take place.

As for public spending on infrastructure, the ruling class can certainly see the need to upgrade roads, ports, railways and internet services, but will they tolerate the increases in government debt or tax increases that will follow? This is relevant to Green New Deal proposals. Any serious effort to halt runaway global warming will cost billions of dollars in public spending. The large public sector infrastructure projects needed to ameliorate climate change might lift the economy and provide millions of new jobs. But if government debt is not to explode, business will have to pay more tax, something they steadfastly resist.

It is also not clear that big infrastructure projects will boost the economy much. They might stimulate growth in the businesses building the bridges, railways and 5G infrastructure but are unlikely to promote widespread recovery. The Japanese case is instructive. The government has run expansionary budgets for more than 20 years, boosting its government debt to 240 percent of GDP, the highest in the world, but the country has experienced low growth throughout that time. Again, the rate of profit is central. If the rate of return on capital is not sufficiently high, no amount of government demand management is going to prompt the capitalists to invest.

Last time around, Chinese growth helped to lift the world economy out of the GFC, but this is less likely this time. Even though it accounts for a much larger slice of the world economy, making it potentially an even more powerful locomotive, the Chinese government has been trying to shift the economy towards domestic consumption in recent years and away from heavy industry. While higher wages in China may boost overseas tourism and demand for European luxury goods, the move away from heavy industry and infrastructure spending cuts demand for German industrial machinery and Canadian, Brazilian and Australian coal, iron ore and gas. Further, the Chinese economy is awash with debt, with corporate bonds having grown from a standing start in 2010 to $2 trillion in 2017, and with the unregulated shadow banking system continuing to grow. China is more likely to be a bigger source of instability than stability during the next recession.

Political problems for the ruling classes

The crisis in the world economy interacts with and compounds imperialist tensions. Imperialist competition between the major powers is on the rise. During the GFC, two G20 summits resulted in member states, which dominate the world economy, putting in place a coordinated plan to implement stimulus programs and to avoid “beggar thy neighbour” currency wars or tariffs. In the event of a fresh crisis, there is less potential to do this this time around.

Even before the GFC, relations had become strained, in particular between the US and EU on the one hand and the big commodity exporters of the global South on the other, with the result that successive WTO forums ended in disagreement: there has not been a single multilateral WTO trade agreement since the 1990s.

Since the GFC, however, disruptions to the world trade system have only increased. With the rise of nationalist strongmen and the further discrediting of the “rules-based international financial order”, conflict between the big powers is likely to grow in the event of a fresh crisis. Given Trump’s tendency to see trade as a zero-sum game, it’s likely that the US would be more inclined towards a mercantilist trade war than any commitment to find a common solution.[21]

But the problem is not just a matter of a few individual leaders. It’s a systemic problem. The OECD, for example, understands that the old world order is gone. They know what is needed, but they know it’s not going to happen. It urges a “collective effort to halt the build-up of trade-distorting tariffs and subsidies and to restore a transparent and predictable rules-based system that encourages business to invest” but laments:

It is now evident that trade tensions are not a temporary side-show. The international framework which governed trade has been permanently impaired and the WTO as we know it will not come back.[22]

The OECD can only suggest a string of regional trade agreements that may end up only diverting trade from one country to another, complicating any attempt at a multilateral agreement at future G20 summits.

And how are the big powers meant to cooperate with each other when the two biggest are at each other’s throats? During the G20 discussions in the midst of the GFC, relations between the US and China had not reached the pitch they have today. The pivot to Asia was still three years away. But today, the US political and military establishment is determined to confront China. What was only a developing contest has today become full blown competition. And relations between the US and EU have also become more vexed over the past decade.

Domestic considerations also weigh on ruling class strategists. Historically, the ruling classes have relied on the mainstream centre left and centre right parties to push through austerity measures when needed. Even though the share of the vote accounted for by the mainstream parties has been in decline since the 1980s, their loss of authority has snowballed since the GFC, with the collapse in support for many social democratic and conservative parties and the emergence, mostly, of parties of the hard right. These new parties have capitalised on the racism promoted by the old parties to deflect attention from their failings to drive things further to the right. Alternatively, as in Britain and America, “outsider” figures Johnson and Trump have taken control of the ruling class’ preferred conservative parties and used them to promote projects to which many in the ruling class are quite opposed, Brexit in the case of Britain, Trump’s erratic foreign policy (including support for Brexit among other things) in the case of the US.

Attempts by the ruling class to impose fresh rounds of austerity in the event of another financial crash might only create further political destabilisation. For some years, capitalist mouthpieces such as the Financial Times (FT) have been warning about the effect of rampant inequality on the social and political order. Leading FT columnist Philip Stephens for example, wrote in 2018:

After a decade of stagnant incomes and fiscal austerity, no one can be surprised that those most hurt by the crash’s economic consequences are supporting populist uprisings against elites. Across rich democracies, significant segments of the population have come to reject laissez-faire economics and the open frontiers of globalisation.[23]

Stephens’ fellow FT columnist Martin Wolf, noting widespread dysfunction in the liberal order, argued in August 2019 that “the way our economic and political systems work must change, or they will perish”.[24] Even the US Business Roundtable, representing the chief executives of 181 of the world’s largest companies, has now begun to consider the limits of a “shareholder first” approach to capitalism, with Roundtable chairman Jamie Dimon, CEO of JP Morgan Chase, warning last year that “The American dream is alive but fraying”.[25]

The ruling classes can see the problems with continuing with the neoliberal prescriptions, but they have no alternative strategy. They could in theory support a program of Keynesian reflation and a boost to working class living standards in order to revive the “American dream”, but none of them is prepared to act on it. None has an interest in doing so and none has the credibility to impose an alternative strategy to that which has been dominant since the 1980s. The ruling classes have two ways to restore the rate of profit: devalue constant capital or drive up the rate of surplus value. There are limits to the former, short of war, meaning that the latter remains their priority. The result is that governing parties, whether established or new, whether they emphasise globalisation or economic nationalism, are increasingly resorting to authoritarianism and racism to push their agenda in an environment of increasing cynicism towards politicians.

The main factor that the ruling classes in the West has going for them is the weak state of working class organisation and politics. Trade union organisation, industrial struggle, broader social struggle and the left are in a worse position than they were at the onset of the GFC in most countries, and some of the left projects that have arisen in response to decades of austerity – Rifondazione in Italy, SYRIZA in Greece, Die Linke in Germany, Podemos in Spain, the NPA and France Insoumise in France, Corbynism in Britain – have failed badly or are failing, demoralising their supporters who saw in them an alternative to the dead end of social liberalism. If the ruling classes of the advanced countries face political difficulties in coming years, the weakness of the left and working class may provide them with some respite.

How does Australia fit into all this?

Australia has escaped an economic recession for more than a quarter of a century. The economy has been propped up by a series of factors:

  • household borrowing, which has fuelled consumer spending at a time of slow growth in income: household debt is now approaching double the level of household disposable incomes;[26]
  • rising commodity prices and volumes exported, to China in particular, which drove record levels of investment in the resources industry and engineering for several years. Record exports of iron ore and LNG in 2018-19 have helped to return the balance of payments to surplus for the first time since 1975 and boosted government revenues;[27]
  • strong demand from China for Australian services which generated billions of dollars for the universities and tourism industry: there are now 150,000 Chinese students enrolled at Australian universities and China has become Australia’s largest tourism market. Both of these have stimulated the property, retail and hospitality sectors;[28]
  • stability in the banking sector, combined with stimulus measures, which helped Australia weather the GFC better than other OECD member states;
  • a boom in the property industry and construction in the period 2012-2017, when mining investments and commodity prices both dropped; and
  • high immigration, which has contributed both to the labour force and demand for housing and consumer goods.

However, it’s worth noting some limits to this growth. Once population growth is stripped out of the GDP figures, growth in Australia drops considerably in international comparisons. As the economic expansion aged, so it slowed: between 1997-98 and 2007-08, GDP per capita rose at an annual rate of 2.4 percent; since 2008 and the GFC the figure has fallen to just 0.8 percent.[29] Business investment as a share of GDP is now at its lowest level since 1994.[30]

As in the United States, the benefits have been uneven. The wages share of GDP is at its lowest level since the early 1960s and average household incomes are no higher than they were in 2012.[31] Australia has one of the developed world’s highest rates of underemployment – those wanting more hours of work than they are currently working. While high house prices in Australia have boosted the wealth of home-owners, they have locked out many potential young house buyers who may never escape the private rental market. Along with the many concessions to those with housing and share investment portfolios and hefty superannuation balances, economic policy has significantly assisted older, usually Coalition-supporting, households at the expense of the young.

Young people are also faring badly in the job market. There are fewer 15-24 year olds in work as a share of their age cohort than there were a decade ago, while the participation rate has risen for all other age groups.[32] The underemployment rate has grown from 16 percent to 21 percent.[33]and while the number of young workers in jobs rose over the decade to 2019, the growth was entirely in part-time jobs (Table 1).

Table 1: Employed persons, by age and employment status, October 2009 to October 2019[34]

Total employed Full Time Part Time
Age group 15-24 15-64 15-24 15-64 15-24 15-64
Change in number employed +80,000 +1,788,000 -83,000 +1,124,000 +164,000 +664,000
Percentage change +4.3 +17.0 -9.7 +15.1 +18.0 +21.3

Even university qualifications have not been enough to shield young workers from the deteriorating situation. On the eve of the GFC in 2008, 86 percent of graduates were in full-time work four months after graduating. The figure fell during the GFC as might be expected, but then kept falling in the years afterwards, bottoming out at 68 percent in 2014. The figure has since risen to 73 percent in 2018, but graduates are still positioned worse than they were a decade ago in finding full-time employment.[35]

Finally, government debt continues to rise long after the Rudd government’s stimulus packages initially blew Peter Costello’s surplus, making a mockery of the Coalition’s boasts about its superior economic management. Net government debt has risen from $161 billion in 2013, when the Abbott government was elected, to $395 billion in October last year.[36]

Australia’s 27 years without recession, a world record, therefore appears less impressive when viewed from this perspective.

And now Australia is experiencing the same rapid slow-down as other OECD members. Economic growth is forecast at just 1.7 percent for 2019, down from 2.7 percent in 2018. On a per capita basis, the Australian economy has contracted or failed to grow in three of the last five quarters. Even if the OECD’s forecast of 2.3 percent growth in 2020 comes to pass, this will the slowest two year period of growth since the early 1990s.

Some other elements of the current slow-down:

  • The Morrison government’s income tax cuts have not stimulated consumer spending or investment, nor has the Reserve Bank’s reduction in the cash rate to just 0.75 percent, the lowest level on record.[37]
  • Business conditions and business confidence have fallen sharply and private demand is now lower than at the beginning of 2018.[38]
  • Building approvals are down in response to the fall in property prices in Sydney and Melbourne in 2017-18. Construction is contracting. House prices are rising again, but it’s not clear how long this will last given the broader economic situation.
  • Consumer confidence is sinking, likely to worsen ongoing problems in the retail sector, where empty shopfronts tell the story. New car sales have fallen every month for 18 months.
  • Employment growth remains reasonable, but in the first ten months of 2019, half of the net increase in employment was in part-time jobs.[39]

The main bright spot for the capitalists is the depreciation of the Australian dollar since the beginning of 2018, helping to boost the competitiveness of exports and the returns to resource companies.[40] Nonetheless, with the Chinese economy slowing and with growth of Chinese imports of goods and services having fallen dramatically since 2016, the cheaper dollar may not help much.[41]

What of the political implications of the changing economic situation? Australia’s relative economic stability in the past two decades has fed into relative political stability, with no significant breakthrough for minor parties or obvious political ruptures. That does not mean that the potential is not there for Australia to follow international trends at some point. The last two serious recessions in the early 1980s and early 1990s were severe, with unemployment rising to 11 percent. The first cost the Fraser government power, while the second nearly brought down the Keating government and did lead to defeat for several state governments. But we are not there yet and the political situation remains flat even if popular frustrations grow with the major parties.

The Morrison government is attempting to ride the commodity price boom to a budget surplus, but if it manages to achieve a surplus, this will be as much due to delaying spending on the NDIS as anything else. The government’s budget predictions of significant surpluses in the early 2020s are predicated on GDP and wages growth projections that show no signs of being achieved. And the ruling class is hardly impressed with the government’s surplus obsession. The attacks on welfare might help keep corporate taxes low, but Australian capitalism cannot prosper just by kicking Newstart recipients. In fact, business has been urging the government to raise Newstart. Of much more concern to the bosses is the fact that growth in labour productivity has halved since 2012 when compared to the preceding quarter century.[42]

The lack of economic dynamism explains why the Australian Industry Group and Reserve Bank are telling the government to start spending on infrastructure – to boost business orders for a year or two.


This article started by arguing that the current conjuncture can be best understood as the coming together of two processes that form the centrepiece of Marx’s theory of economic crisis: a downswing in the business cycle of the type that has characterised capitalism since its birth and the corrosive effect of the long term tendency of the rate of profit to fall. It is the latter in particular that explains why the GFC occurred, why the subsequent recovery has been so feeble and why we are facing a return to economic slump today. Only by understanding the deep roots of the crisis can we see why the various strategies being proposed by organisations such as the OECD are incapable of fixing the problem at the heart of the system. Only by coming to grips with the fact that it is the rate of profit that drives all else, and that the rate of profit is under long term pressure, can we comprehend why the capitalists and their governments have no alternative but to attack the working class, regardless of the pain it causes. This is so despite the handwringing by the Financial Times and ruling class think-tanks about the social and political consequences of rising inequality and continued austerity.

Only time will tell whether the world economy, or substantial parts of it, enter a new recession during 2020. There are plenty of unknowns, including oil prices, the impact of Brexit, the potential for trade tensions to worsen, the risk of a sharper slowdown in China or a financial crisis sparked by the overhang of corporate indebtedness. On the other hand, it’s possible that trade tensions could ease, boosting business confidence. It’s possible that the resumption of central bank interest rate cuts might prevent investment and consumer spending from sliding (even if this will simply delay the day of reckoning and ensure a deeper crisis when it finally arrives).

However, if we can’t be definitive, we can certainly say that a recession is due soon. It is already the case that corporate profits in the US have fallen for three successive quarters. And we can also say that the long term pressure on the rate of profit will exacerbate the downswing in trade, investment, output and employment. Interacting with these economic tendencies are two important political factors: rising imperialist tensions between the world’s biggest powers and increasing recourse to authoritarianism and racism by the governing parties. An economic slump will only exacerbate both.

The issue, then, is ultimately whether the working class is willing to bear the burden of capitalism’s long term crisis. The eruption of protests against neoliberalism in the last few months of 2019, ranging from Ecuador to Chile, from Lebanon to Iraq, demonstrates that workers around the world have had enough of ruling class attacks. Whether these outbursts of popular struggle against inequality and austerity in what are predominantly countries at the periphery of the world system can find their way into the centres of world capitalism will determine the shape of world politics in the years to come. We can only hope that the general strike in France in early December, the biggest since 1995, is an augury of things to come. But to make the most of these outbreaks of struggle, we need revolutionary socialist organisations. Without the left rebuilding its forces, the right, whether in government or outside, can step in to capitalise on popular hostility to austerity and use it to target not those who are responsible for it but its biggest victims: immigrants, refugees and oppressed religious and racial minorities.


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[1] OECD 2019a.

[2] For an introduction to Marx’s theory of economic crisis, see Harman 1984 and Bloodworth 2008.

[3] OECD 2019a.

[4] All data in the following are from OECD 2019a unless otherwise stated.

[5] Boone 2019.

[6] Brown 2019.

[7] James Politi, “Vague détente in US-China trade war hinges on tricky implementation”, Financial Times, 15 December 2019.

[8] Roberts 2016.

[9] The explanation that follows draws on Harman 2009 and Carchedi and Roberts 2018. See also Bramble 2018.

[10] Carchedi and Roberts 2018.

[11] The Federal Reserve cut the cash rate, the basis for the whole structure of interest rates in the US economy, from 4.25 percent in December 2007 to zero 12 months later, where it remained until 2015. The European Central Bank first cut its rate to 1 percent and then in 2016 to zero (and in September 2019 to minus 0.5 percent).

[12] Taylor Telford, “Income inequality in America is the highest it’s been since Census Bureau started tracking it, data shows”, Washington Post, 27 September 2019; Kadhim Shubber, “Eight charts on inequality in the US”, Financial Times, 4 January 2018.

[13] Federal Reserve Bank of St Louis, Economic Research,; Federal Reserve Bank of St Louis, Economic Research,

[14] The index of real wages for private sector production workers and non-supervisory employees in the US in September 2019 stood at 105.6 as compared to 108.1 in January 1973 (January 1970 = 100), Federal Reserve Bank of St Louis, Economic Research,

[15] The editorial board, “The world should beware a technology cold war”, Financial Times, 11 December 2019.

[16] In US dollar terms.

[17] All data on debt and bonds in this section are from McKinsey Global Institute 2018. For more on the significance of corporate debt, see Roberts 2019.

[18] Tommy Stubbington, “Global debt at its highest level in peacetime”, Financial Times, 26 September 2019.

[19] See Carchedi and Roberts 2018, pp22-28.

[20] Choonara 2019.

[21] Edward Luce, “Trump is serious about US divorce from China”, Financial Times, 19 September 2019.

[22] OECD 2019b; Boone 2019.

[23] Philip Stephens, “Populism is the true legacy of the global financial crisis”, Financial Times, 30 August 2018.

[24] Martin Wolf, “Why rigged capitalism is damaging liberal democracy”, Financial Times, 18 September 2019.

[25] Business Roundtable 2019.

[26] Reserve Bank of Australia 2019, p7.

[27] Martin Farrer, “Australia’s mining exports hit $278bn – but bonanza at risk, says report”, The Guardian, 29 March 2019; Angus Grigg and Angela Macdonald-Smith, “The trade war is making China more reliant on Australia”, Financial Review, 15 August 2019; Reserve Bank of Australia 2019, p16.

[28] Department of Foreign Affairs and Trade 2019.

[29] Borland 2019.

[30] Reserve Bank of Australia 2019, p8.

[31] Greg Jericho, “Take it from me – a recession doesn’t bear thinking about”, The Guardian, 24 September 2019.

[32] Australian Bureau of Statistics 2019a.

[33] Australian Bureau of Statistics 2019b.

[34] Australian Bureau of Statistics 2019a.

[35] All figures on graduate employment from Quality Indicators for Learning and Teaching 2019.

[36] Department of Finance 2019.

[37] By comparison, the RBA cash rate on the eve of the GFC in August 2008 was 7.25 percent.

[38] Reserve Bank of Australia 2019, p9.

[39] Australian Bureau of Statistics 2019b.

[40] The prices of Australian resource exports are fixed in US dollars. A fall in the Australian dollar against the American means that resource companies get a higher Australian dollar return on the sale of a tonne of coal or iron ore on international markets.

[41] Chinese imports of goods and services from all sources were predicted to fall by nearly 2 percent in 2019 and for the next two years to rise by less than 2 percent annually. OECD 2019a.

[42] Reserve Bank of Australia 2019, p11; Borland 2019.