Central banks: boom or slump?

3 February by Michael Roberts

Source : Pixabay

Three of the major central banks met and raised their policy interest rates yet again in the so-called ‘fight against inflation’. Interest-rate levels are now at 15-year highs. But the financial markets took the comments of the central bankers as signalling that their policies were working and inflation was falling. And it would fall sufficiently for the central banks to stop raising rates soon and so avoid an economic slump.

This is wishful thinking. The bank chiefs made much of the apparently less worse levels of economic activity in recent real GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
data. But this again is wishful thinking or white-washing.

International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

is now predicting no slump this year and raised its growth forecasts (slightly). It now reckons global growth in 2023 will be 2.9% from a previous forecast of 2.7%, but that’s still well below the 3.4% the IMF estimated for 2022. And the new forecast for 2023 is really based on a pick-up in growth in China and India, with two countries providing more than 50% of global expansion this year. The major capitalist economies are not expected to manage more than 1% or so.

Nevertheless, the IMF chief economist pushed out the boat of optimism. Pierre-Olivier Gourinchas, IMF chief economist, said 2023 “could well represent a turning point”, with economic conditions improving in subsequent years. “We are well away from any [sign of] global recession,” Gourinchas said, striking a sharp contrast with remarks by managing director Kristalina Georgieva last month that recession would hit more than a third of the global economy.

The US reported an annualised growth rate of 2.9% in Q4 2022 and and that led to a chorus of economists firmly dismissing a slump this year. But this annualised measure is misleading. In Q4 2022 US GDP was up only 1% compared to Q4 2021. More significant, inventories (ie stockpiling goods) contributed over half that 2.9% annual rate in Q4. Sales to Americans (consumers and producers) were virtually flat, while business investment rose at under a 2% rate. Real spending by consumers was relatively strong at 2.1% but that depended on previous fiscal handouts from government in the last year being spent. US real GDP growth has slowed from 5.4% yoy in Q4 2021 to just 1.0% yoy in Q4 2022. The US economy is moving towards a recession.

US real GDP growth has finally returned to its pre-pandemic trend rate but only after three years of recession and below trend growth. And now it could turn down again.

It’s similar story for the Eurozone. The Eurozone economy grew just 0.1% in Q4 2022 and if the ludicrous 13% GDP growth figure recorded for Ireland is discounted, Eurozone output fell by 0.1%. The reason the Irish GDP growth rate is so high is because it includes the booking of multi-national corporate profits in Ireland as a tax haven Tax haven A territory characterized by the following five independent criteria:
(a) opacity (via bank secrecy or another mechanism such as trusts);
(b) low taxes, sometimes as low as zero for non-residents;
(c) easy regulations permitting the creation of front companies and no necessity for these companies to have a real activity on the territory;
(d) lack of cooperation with the inland revenue, customs and/or judicial departments of other countries;
(e) weak or non-existent financial regulation. Switzerland, the City of London and Luxembourg receive the majority of the capital placed in tax havens. Others exist, of course, such as the Cayman Islands, the Channel Islands, Hong Kong and other exotic locations.

Indeed, major EZ economies like Germany and Italy contracted in Q4, while France just escaped contraction. And outside the Eurozone, both Sweden and the UK contracted.

As for the UK, the economy is heading down fast. The economy contracted in Q3 2022 and was probably flat in Q4. But even the BoE admits contraction is likely this quarter and beyond. Indeed, according to the IMF, there is only one economy out of 30 it reviewed that will have a slump this year – and that is the UK.

It’s true that headline inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. is coming down in most economies as food and energy prices which drove the rates up last year have begun to fall back – although they are still much higher than at the beginning of 2021. It is worth remembering that falling inflation does not mean that prices have fallen – just that the rate of increase has slowed. Indeed, in the US, prices have risen 15% in the last two years, while wage increases have been half that rate.

One measure of the impact on average households in the major economies is the so-called misery index. This an aggregation of the unemployment rate and the inflation rate – the twin devils for working people. Official unemployment rates have stayed near post-war lows (I won’t discuss now the validity of this data) but the huge rise in inflation rates has taken the misery index to highs not seen for 35 years.

Headline inflation rates may be falling but what is called core inflation remains ‘sticky’. Core inflation rates exclude food and energy prices and they show little sign of dropping much.

This is what worries central banks. And what it also shows is that interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. -rate hikes have little effect on reducing inflation, which rose because of food and energy prices, something central banks cannot control and are now falling for reasons nothing to do with central banks. Instead, central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
rate hikes are increasing the cost of borrowing to spend for households and invest for companies. Indeed, as ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.

chief Lagarde said at her press conference, monetary tightening was being ‘very efficient’ in squeezing the real economy. As I have argued in a previous post, profits are now being squeezed as price inflation abates. And rising interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
are squeezing companies at the other end.

Sure, if consumer spending and business investment slumps, then core inflation will eventually fall, but only as economies drop into recession. Even then, the major economies may enter a slump in production and a rise in unemployment this year, but still have inflation rates well above the levels of two years ago – the worst of all possible worlds.

Michael Roberts

worked in the City of London as an economist for over 40 years. He has closely observed the machinations of global capitalism from within the dragon’s den. At the same time, he was a political activist in the labour movement for decades. Since retiring, he has written several books. The Great Recession – a Marxist view (2009); The Long Depression (2016); Marx 200: a review of Marx’s economics (2018): and jointly with Guglielmo Carchedi as editors of World in Crisis (2018). He has published numerous papers in various academic economic journals and articles in leftist publications.
He blogs at thenextrecession.wordpress.com

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