The great contraction

Signs of a great contraction of the global conomy are appearing throughout the world, pushing aside any lingering notions of the return to growth that capitalism requires.

Following six months of stagnation, the Bank of England said today that the near-term outlook for growth had worsened since February, while prices would rise, and that first-quarter growth had been slower than it had predicted. Governor Mervyn King also blamed the extra public holiday for the royal wedding, and disruption to supply chains from the Japanese earthquake, for the slowdown.

Since the recession started, the financial sector has shrunk by 9% - twice the 4.7% decline in the economy as a whole to the end of 2010. As big banks continue to offload loans and reduce balance sheets, the process is likely to constrain the economy’s growth rate for years to come.

In the United States, the independent Consumer Metrics Institute (CMI) presents a stark truth emerging through the clouds of delusional confidence. Last week it report that “after a week-long pause our Daily Growth Index resumed its movement into record territory, setting a new all-time low representing a 6.39% year-over-year contraction on May 3, 2011”.

Revised official figures from the US Census Bureau more than confirm the CMI’s more accurate grip on the reality of deepening decline. It reported that 2010 "furniture and home furnishings stores" sales were 3.6% weaker than previously reported, turning an 0.8% gain into a -2.4% contraction while "miscellaneous store retailers" dropped some 6.7%, nearly wiping out the earlier 7.6% alleged gain.

Japan, the world’s third largest national economy, is struggling to recover from the effects of the earthquake and tsunami which overwhelmed the inadequate and badly maintained defences of Tokyo Electric Power’s Fukushima reactors, forcing the closure of swathes of production across the world. Latest estimates from Goldman Sachs economists indicate a contraction of 0.2% in 2011 revised down from an 0.7% gain.

In the eurozone, Greece’s economy contracted by 4.5% in 2010 and is expected to shrink by another 3% this year. German consumers have been hit hard with a 2.1% monthly contraction in spending. The overall drop is 1.7% for the year, and it is now at the lowest level since November 2009. The German thrift is even more remarkable given that unemployment is lower there than anywhere else in Europe. In Spain the March 1.4% fall in retail sales extended the string of losses to twelve consecutive months. In bankrupt Ireland, house prices are down by at least 33% from their peak - the largest contraction in Western Europe since the global economic crisis began.

In Serbia, the International Monetary Fund, which provided a loan of €3 billion in 2008 are busy strong-arming the country’s government into revising its shrinking GDP figure for 2009 sharply downward from a contraction of 3.1% to over 6%As a result, Serbia’s debt – and the payments to be made by its increasingly unwilling population – will be sharply higher than previously thought. Tens of thousands have attended anti-government rallies.

Meanwhile, bonuses for chief executives at 50 major US companies bounced back by an average of 30.5% in 2010, the Wall Street Journal has reported. This was the biggest gain in at least three years. Goldman Sachs chief executive Lloyd Blankfein's total compensation, including a cash bonus, had been raised to $19 million in 2010. His pay package includes a salary of $600,000, a cash bonus of $5.4 million and stock awards of $7.65 million for 2010.

But while investment banks like Goldman Sachs prosper – having moved into commodity futures in a big way – the productive economy is going to hell in a handcart. The banks left over from the crash may be too big too fail – but the global economy itself isn’t.

Gerry Gold

Economics editor