BY EVA CHENG
Until the September 11 terrorist attacks in New York and Washington, most mainstream commentators were reluctant to admit that the world was confronting a synchronised new recession. Their tone universally changed after that day: they now say that a global recession has almost certainly arrived, and that the attacks are the trigger.
The new willingness to use the "R" word was reinforced by the US Federal Reserve statement on September 17 as it slashed the official interest rates for the eighth time this year. "Even before the tragic events of last week, employment, production and business spending remained weak, and last week's events have the potential to damp spending further", the Fed stated.
In rare coordinated interventions with other central banks in Europe and Japan, the Fed hugely increased the emergency loans on offer to the banking system, fearful that a liquidity crisis could unleash a domino effect through the credit system and further destablise the fragile world economy.
Most other central banks also cut their official interest rates by a substantial 0.5% and on September 12 they and the Fed supplied US$120 billion of liquid funds worldwide.
The US Securities and Exchange Commission also used its emergency power to suspend a range of trading and other restrictions to prevent the stock markets entering a freefall.
Airlines crisis
The new recognition that a recession is around the corner is based largely on the perceived dent in US consumers' willingness to spend in general and to fly in particular, which will reinforce the losses already inflicted on the airline industry as a direct result of the terrorist attacks.
The travel and associated industries will also be hit, affecting the supplies of various manufacturing industries, not to mention the impact on the insurance industry. Given the centrality of the US economy, especially as an export outlet, its troubles are expected to spread worldwide.
The flood of announcements since September 11 of layoffs, profit warnings and production cuts seems to confirm this belief that the terrorist attacks have pushed the world into recession, reinforced by the pronouncements of many companies that their decisions were prompted by the terrorist attacks.
Examples include Boeing's move to cut up to 30,000 jobs, Continental Airlines' to sack 12,000 workers (21% of its workforce) and US Airways' to eliminate 11,000 positions (24% of its workforce). Midway Airlines closed down altogether, with Continental threatening to do the same if Washington didn't help out.
For the time being, Continental will cut its flight schedule by 20%, mirroring the moves by Northwest, American, Delta, United and Air Canada. Britain's Virgin Atlantic also plans to cut 1200 jobs while Belgian airline Sabena said it would be in danger of bankruptcy if it didn't cut 1400 jobs. KLM of the Netherlands is now expecting an operating loss.
Outside the airline industry, the attempt to blame the terrorist attacks for an "unexpected" drop in profits is also widespread.
General Electric, the world's most valuable company, is one such case, as are Honeywell, Citicorp, American Express, the New York Times, the British-based Avesco, and LVMH, the world's largest luxury goods group based in Paris.
Also holding the attacks responsible for a disruption in parts and material supplies are US car manufacturers such as General Motors, Ford Motor Company, DaimlerChrysler and Toyota, whose plants in North America have announced new production cuts.
However, if the terrorist attacks hadn't happened, would a global recession still be as likely?
While airline stocks plunged across the board after September 11, some by as much as 50%, which hurt their funding costs, dampened travel flow and hit revenue, these aren't sufficient reasons to push a healthy industry into crisis.
Overcapacity
Like the automobile, pharmaceutical, chemical, banking and insurance industries, just to name a few, airlines have been plagued by serious overcapacity for years.
In an attempt to outcompete rivals, airlines have been under immense pressure to expand their economies of scale, invariably on borrowed funds, making them extremely vulnerable to jumps in financing costs. Razor-thin profit margins have also given airlines little room to accommodate abrupt bad turns.
These are structural problems common to many key industries in late monopoly capitalism, which are plagued by overcapacity and a deep and precarious reliance on debt (coexisting, ironically, with enormous speculative capital).
The airlines seem keen to blame these longstanding problems on the September 11 attacks, even demanding the government bail them out.
However, as early as August, Midway had already filed for bankruptcy, stressing then a tremendous drop in business traffic.
On September 4, British Airways announced the reduction of 1800 positions. In mid-August, holding up slow sales as the reason, Boeing announced new job cuts, bringing the total since May to 1200. On August 9, Sabena said it would sack 1600 workers to help it return to profit in 2005. On August 1, Air Canada eliminated 4000 jobs, on top of a cut of 3500 positions earlier, as part of a plan to cut costs.
Nor did the troubles of the auto industry start on September 11. The UN's World Investment Report 2000 said more than year ago, "The automotive industry has gone through substantial restructuring in recent years, partly as a result of weak demand, overcapacity ... This is an industry where size matters." Job loss and production cuts have been a feature of this industry for years, in the US and beyond.
Even before September 11, all key indicators have for months been pointing to a US economy in serious trouble.
Industrial production had slid for 10 straight months and unemployment had risen from 3.9% to 4.9%, bringing the total unemployed to nearly seven million. This rise of one full percentage point dwarfed the highest previous jump of 0.4% that had ever been recorded outside a recession.
Instead of registering from these facts a firm downward trend, many mainstream economists forecast a "V-shaped" recovery "soon".
Then on September 14, it was announced that US industrial production slid again in August for the 11th straight month, making it the longest such decline since 1960-61. The cumulative decline amounted to 4.8%, the sharpest since 1983. The "recovery" school instantly died out, replaced by the popular "forecast" of a mild recession.
But going by the conventional definition of recession — two consecutive quarters of negative gross domestic product growth — the US isn't yet technically in recession, notwithstanding the August 29 revision of the June quarter GDP growth to 0.2% from the earlier estimate of 0.7%, the lowest growth recorded since the downturn started nearly a year ago.
But while that might be the conventional definition of a recession, it's not the official one. According to Anirvan Banerji, research head at the US-based Economic Cycle Research Institute, the official definition doesn't rely on GDP. He said indicators such as industrial production and employment were employed instead, adding "the indicators that officially define recession have already behaved in a way only ever seen in recession, and GDP will surely follow".
Moreover, any recovery can be ruled out unless the sharp reduction in capital formation is reversed. From an annual growth of 20% in early 2000, investment spending in the US plunged to a negative 0.6% in the fourth quarter and has continued to stay flat ever since.
This contraction occurred because capitalists are unconvinced the prospective return is sufficiently profitable. This, in turn, hit industrial production, employment and, ultimately, the overall economic output.
A significant rise in consumer demand will of course change capital spending decisions, but such demands will first have to mop up a good part of the excess capacity that has been building up during each upturn of the business cycle.
Instead of being put to constructive social use, the rise of productive forces under capitalism have again and again been turned into a key contributor to the growing problem of overcapacity.
This problem is often made worse by the swelling pool of speculative capital, also inherent in capitalism, as happened during the formation of the dotcom-driven stock market bubble of 1998-2000. That wave was accompanied by a frantic race for new capital investments, especially in information and communications technologies.
Ironically, that bubble was encouraged while the US Federal Reserve was trying, by aggressively cutting interest rates, to innoculate the US economy against the overcapacity crisis that hit Asia and Russia in 1997-98.
The other major economic blocs, such as the European Union (EU) and Japan, are not immune from overcapacity, but their cycles do not necessarily coincide with the US.
Japan, for example, has already been in virtual recession ever since its own stock market bubble burst in 1990. Then it reported a new contraction of 0.8% for its GDP in the June quarter, and a 3% fall in industrial production in July.
Like the US, the EU's economic performance has been downhill since the end of last year, with industrial production plunging from 7.4% in December 2000 to 0.5% in April, minus 0.9% in May and 0.9% in June. Its gross capital formation also dropped all the way from 5.8% in the fourth quarter of 1999 to 0.3% in the second quarter of this year.
It's hardly surprising that the US's demise has reverberated elsewhere, especially in Asia. The US, which alone accounts for 30% of world GDP, buys 22% of Europe's exports, 30% of Japan's, 22% of China's, and about a quarter of other Asian countries. This widespread dependency on the US market has laid the basis of a US-led synchronised global recession.
Capitalism has traditionally been relying on periodic capital destruction, the weeding out of weaker competitors or even outright wars, to bring about a new cycle of expansion. Seizing on the terrorist attacks as an excuse, this is what the US corporate sector, government and military machine are now seeking to do.