Recession and global financial turbulence return By Nick Beams WSWS 14 July 2001 The announcement by the Singapore government this week that the island's high-tech-based economy had officially entered a recession—defined as two consecutive quarters of negative growth—has served to underline the global impact of the slowdown in the United States and the growing fears of a global recession. According to the latest data, Singapore's gross domestic product fell at an annualised rate of 10.1 percent in the second quarter, after contracting by 11 percent in the first quarter. At the same time, rapid movements in so-called "emerging financial markets", arising from fears that Argentina could default on its debts and/or devalue its currency, have prompted concerns that the international financial system could see renewed turbulence on the scale of the "Asian crisis" 1997-98. The latest Argentine crisis erupted on Tuesday when the government was forced to pay 14 percent interest on 90-day treasury bills to help refinance $850 million in dollar denominated debt, compared to the 9 percent interest it paid on similar bills last month. With Argentina accounting for around 25 percent of all emerging market debt, the interest rate hike produced a reaction around the world. In Brazil, stocks fell by more than 2 percent and the currency fell to its lowest level ever against the US dollar. In financial markets in Africa, Latin America, Eastern Europe and Asia, stocks, bonds and currencies were sold off in what was described as a "classical mode of financial contagion." In London, chief European economist at Bear Stearns, David Brown, told clients that it was "back to square one again on emerging market jitters, with contagion fears breaking out among investors." Brown said that while Argentina was in the forefront of market concerns "worries about Turkey and Poland are in the thick of it as well." Seeking to contain the crisis, the International Monetary Fund said that international financial support, amounting to almost $40 billion, meant that the Argentine government should be able to meet its debt obligations this year. But it was forced to acknowledge that after that "the arithmetic does not work" unless the economy began to grow much more strongly. But this is precisely the problem. Argentina, which has been in recession for three years and is faced with debts of $128 billion, equivalent to about half its GDP, is now being caught in the international downdraft created by the rapid slowing of the US economy. This is what has sent the far stronger Singapore economy into recession. With growth of 9.9 percent last year, the government had forecast growth this year of between 5 percent and 7 percent, but was forced to revise its estimate last April to between 3.5 percent and 5.5 percent. Now it has further slashed its forecast to between 0.5 percent and 1.5 percent amid predictions that growth for the year may be negative for the first time since 1985. The economic downturn is spreading across the East Asian region with Taiwan and Thailand both reporting negative growth in the first quarter and Hong Kong and South Korea showing slower growth. In Malaysia, the Mahathir government insists that the economy will not enter recession, but the figures are pointing in that direction. Exports fell in May by almost 7 percent compared to last year while more than 3,000 workers were retrenched—nearly four times the figure for the same period last year. The Malaysian Trades Union Congress has predicted the loss of nearly 100,000 jobs in the electronics industry and that half the industry's workforce could be laid off this year. The East Asian slump is directly attributable to the sharp slowdown in the US. According to the investment bank Morgan Stanley, as much as two-fifths of the GDP growth in East Asia last year came from information technology exports to America. Now the investment boom has collapsed, with new orders for computers and electronic products falling by a third in the year to May. Consequently exports from East Asia, not including China, have fallen by 10 percent over the past year, compared to an annual growth rate of nearly 30 percent in early 2000. But the effects of the US downturn are not confined the East Asia. They are now starting to impact on Europe, where Germany is on the edge of recession. This week the Berlin-based DIW research group predicted that the German economy, which accounts for nearly one-third of the output of the 12-member European Union, would grow by only 1 percent this year, after earlier forecasting a 2.1 percent growth rate. The IMF has cut its prediction from 1.9 percent to just 1.25 percent. DIW said the German economy, which depends on exports, was being hard hit by the slump in Japan and the US. Stagnation in Japan The ongoing recessionary processes in the Japanese economy are now being exacerbated by slowing US growth as exports are reduced. Figures issued this week show a 46 percent fall in the current account surplus. Commenting on the state of the economy, the government noted that unemployment remains at a record 4.9 percent, consumer spending is weak, and exports and production continue to diminish while corporate profits are flat. The advent of the Koizumi administration, with its promises of "economic reform," has sparked a debate over whether economic "restructuring" should proceed first through cuts in government spending or the elimination of bad debts from the banking system. The advocates of the former course insist that the spending policy has failed and is simply being used to prop up vested interests in the ruling Liberal Democratic Party whose power must be broken if there is be an economic revival. The opponents of spending cuts maintain that unless the government provides a boost to the economy, the level of corporate bankruptcies produced by bank restructuring will push the country into a deep recession. In fact, both the growth of government debt and the bad loans in the banking system are financial expressions of the ongoing stagnation of the economy. It is estimated that some two-thirds of the growth in the budget deficit, now running at an annual level equivalent to 10 percent of GDP, is attributable to falling tax revenues—a consequence of low economic growth—with only one-third the result of increased government spending. In other words, the deficit is only a symptom of the problem. The same conclusion can be drawn in relation to bank debt. It is estimated that at least 10 percent of the current bad debt held by the banks arose in the past year. The problem is getting worse as the continued decline in the economy means that loans, which once might have been sound, turn sour. The intractable nature of the Japanese slump has been highlighted by the latest report on the economy by Moody's Investor Services, the global credit rating agency. Casting doubt on the ability of the Koizumi government to revive the Japanese economy, the agency decided to leave the country's credit rating at the Aa2 level it set in September last year. Considerable financial, economic and political uncertainties remained, it said, and the government debt, running at around 130 percent of GDP, showed no sign of leveling off. "The complexity of Japan's economic malaise means that no single policy, or mix of policies, has been able to place the economy on a sustainable growth path and it is highly unlikely that any single policy will be the silver bullet," the agency said. These remarks could be equally well applied to the US economy and the attempts of the Federal Reserve Board provide an economic boost by cutting interest rates. The fundamental problem with this policy is that increased interest rates are not the cause of the US slowdown and therefore their reduction will not bring about a cure. In fact, the decline in capital investment, especially in the high-tech area, and the global slowdown it has triggered, is in part the consequence of previous interest rate cuts by the Fed. When the so-called Asian financial crisis demonstrated its inherently global character with the near collapse of the US hedge fund Long Term Capital Management in September 1998, the Fed cut US interest rates in order to prevent a "systemic" crisis of the banking and financial system. As a consequence the already developing stock market boom (Greenspan had referred to "irrational exuberance" back in December 1996) intensified, leading to massive over-investment, particularly in high-tech and communications. The seeming ability of the Fed to head off the Asian crisis and promote a boom in the US gave rise to claims that a "new economy" had been created. But, as in all previous investment booms, the illusion that essentially speculative gains constituted a new era soon ran up against the hard realities of the capitalist economy. Halfway through last year profits began to fall, leading to investment cutbacks and a rapid slowdown in the economy. Three years ago the US Federal Reserve Board was able to avert a global crisis through a series of interest rate cuts but it did not touch its fundamental causes. The 1997-98 "Asian crisis" was an expression of the growth of over-capacity in key sections of the world economy and the consequent pressure on the rate of profit. Fuelled by the Fed's interest rate cuts, the rapid growth in the US economy in the latter part of the 1990s, which accounted for around 40 percent of the increase in world GDP, delayed its effects. But in the same way that a shot of adrenaline can give a short-term boost to the human body without curing an underlying illness, the Fed's interest rate cuts did not alleviate the problems which had given rise to the crisis. On the contrary, while providing short-term relief, they worked to intensify them in the longer term. That is the underlying significance of the re-emergence of recession in East Asia and the renewed turbulence in international financial markets.
