CREDIT CRUNCH

Credit crunch

Credit crunch

A world economic recovery is underway, but how long will it last? One factor, says Keith Harvey, will be the outcome of the current debates about banking and financial regulation. World capitalism is in recovery, with industrial production and growth rates up. But debates continue within capitalist governments on how to prevent future meltdowns of the world financial system. The reforms that are finally adopted will be decisive for determining whether global capitalism can kick-start a further prolonged wave of recovery in outcome profits and productivity, or whether capitalism will be mired in stagnation, as it struggles to shrug off a legacy of bad debts. The end result of the present debate and the implementation or otherwise of the raft of proposed measures could have far-reaching effects upon finance capital and the future role of banking in the post-credit crunch capitalist world.

The recovery

Since the summer G20 governments and international agencies have become far more optimistic about the world economy. The recession bottomed out in the USA and parts of the EU during the second quarter. Between June and August the USA economy grew 2.8% while that of the European Union expanded by 1.6% and Japan by 4.8%. In November 2009 the EU Commission reported that after a contraction of 4.1% this year, growth was expected to reach 0.75% in 2010 and 1.6% in 2011.

On the other side of the northern hemisphere China continued to grow strongly over the summer. China's economy expanded 8.9% in the third quarter from a year earlier, the biggest gain in a year. Meanwhile, India's economy expanded at the fastest pace in 18 months, as manufacturing jumped. GDP grew 7.9% on an annualised basis in the three months to the end of September. Goldman Sachs predicts world growth will reach 4.4% in 2010, still a relatively low figure compared with recoveries from previous recessions of this scale.

As a sign of confidence in the future, investors have pushed stock markets up by more than 60% from the lowest point since the credit crunch.

The recovery is due to a combination of essentially three things; the emergency G20 government rescue packages implemented after the collapse of Lehman Brothers in September 2008; the end of de-stocking which saw industrial production slashed last winter as firms feared another Great Depression; and the recovery of world trade from the spring of this year.

Direct injections of government cash to specific banks, part or wholesale nationalisation of banks and insurers, bad debt guarantee schemes and “quantitative easing”, meant that measures of financial stress fell by the summer to levels existing before the credit crunch had begun.

In addition, governments boosted consumer demand by such measures as the “cash for clunkers” scheme to help sustain demand for cars in the USA and Europe. Obama introduced a near $800bn package of economic measures while the Chinese government embarked on a $590bn domestic infrastructural investment programme to cushion the economy from the effects of the dramatic collapse in exports last winter and has instructed its banks ...