Global Economy Nearing a “Structural Recession”

And monetary policies will be “ineffective”

To the never-ending astonishment of our economists, global growth has been much weaker since the Financial Crisis than before it, despite enormous global stimulus from years of extreme central-bank monetary policies and record amounts of government deficit spending.

This should not have happened, according to our economists. Fiscal stimulus and expansionary monetary policies beget economic growth, which beget even more economic growth. That’s the theory. And that’s precisely what hasn’t happened. All it did was inflate asset prices. But the global economy has been a dud.

“If we calculated global growth with China’s true growth rate and not the official rate, global growth in the second quarter of 2015 would be only 2%,” figured Natixis, the investment bank of France’s second largest megabank, Groupe BPCE.

This “sluggish growth, close to a recession, is due to persistent, structural causes; we therefore use the term ‘structural recession’ to show that it does not have a cyclical origin,” the report explained. It’s not caused by normal cyclical fluctuations, but by “persistent structural problems that are specific to each region.”

China loses its cost-competitiveness

The problem dogging China is the soaring cost of labor, in an economy that is still too centered on low-end products and exposed to “a very high level of the price elasticity of exports.” Thus, if Bangladesh or Vietnam can produce it a little more cheaply, China loses those exports.

Labor costs have soared in the double digits year after year. Even per-unit labor cost, which compensates for productivity gains, has jumped year over year: in 2015, by 4.5%, which is at the low end; and by over 10% at the high end in 2000-2001 and 2007-2008.

Hence a decline in exports of those products, a weakening of investments, and a sharp weakening of what Natixis calls China’s “true growth.”

Japan Inc. shortchanges its workers.

The main problem in Japan is “the excessive and virtually continuous distortion of income distribution at the expense of employees.” This shows up in the “frequent decline in real wages.”

OK, that sounds like an American disease as well, and it is….

Real per-capita wage growth in Japan has been negative year over year since 2013. From 1998 to 2012, there had been five significant periods with real wage declines. Yet per-capita productivity has continued to grow. And real GDP per working-age population has outgrown the rates in the US, the Eurozone, and the UK, as this chart from the Bank of International Settlements shows (blue line = Japan):


The Japanese are working hard and productively but are increasingly reduced to cheap labor by Japan Inc. The consequences of Abenomics, including a bout of inflation, have made this condition worse. If workers don’t make enough money, household demand is left twisting in the wind.

Household demand moved in fits and starts. But on April 1, 2014, the consumption tax hike hit, and household demand plunged. It’s now merely 9% above where it had been 1998.

Emerging countries other than China suffer from bottlenecks.

Growth, and in particular industrial growth, in these countries has been “slowing down markedly.” Growth in manufacturing production has trended down ever since the V-shaped post-Financial Crisis recovery and has recently dipped into the negative. This has pushed GDP growth down into the 3% range. But these should be the fastest growing economies!

The report blames “the many bottlenecks,” including a shortfall in sufficiently skilled workers, a shortage of energy production – with electricity production stagnating for the past 15 years – and sorely lacking transportation infrastructure.

Commodity exporters get squashed by plunging prices.

The plunge to multi-year lows in the prices of oil, natural gas (LNG), copper, iron ore, tin, gold, silver, and so on have hit each commodity-exporting country in its own way. They include Saudi Arabia and other OPEC countries, a number of African countries, Russia, Australia, and Canada.

For commodity exporters as a group, GDP growth is now hovering at 2%, according to the report. But this might get worse: Russia is in a deep recession, Canada in a technical recession, and Australia looking increasingly shaky.

Government revenues in many of these countries are based in part on the value of commodity exports. And if some of these countries have to grapple with their fiscal deficits in the future by cutting back government spending, growth will take another hit.

The US gets tripped up by energy sector horrors.

The collapse in oil and gas prices has caused companies directly and indirectly in the industry to cut back. Thus a “downturn in productive investment and industrial production as a whole,” which has weakened the economy further, even as GDP growth has been in the already lousy 2% range ever since the “recovery” from the Financial Crisis.

But there is hope, the report found – the US being the only area where the report mentioned any signs of hope: “The second quarter figures nevertheless show that investment seems to be picking up.” OK, maybe just a glimmer.

Eurozone is mired in uncertainty and under-investment

The debt crisis has had consequences: falling investment “linked to excess indebtedness and uncertainty.”

Public investment dropped from the range of 3.2%-3.5% of GDP before the Financial Crisis to 2.6%. Yet, government debt as a percent of GDP has continued to balloon in most Eurozone countries. Corporate investment has only been inching up over the last two years, after a steep decline, and remains substantially below where it had been before the Financial Crisis. And household investment in housing has plunged.

While the Eurozone emerged from its long recession, growth has been anemic, with GDP inching up at around 1% over the past two years.

All these problems are structural, rather than cyclical, according to Natixis. They’re not part of the normal fluctuations that could be dealt with via stimulus programs or monetary policies. Natixis:

Expansionary monetary policies, although they are being used, are unable to pull the world out of this situation of structural recession.

Instead, these economies would have to attack their structural shortcomings. China would have to move up the value chain, which takes time and is painful. Japan would have to correct the “anomalies in income distribution” and pay workers more, which would make Japan Inc. less competitive and the elite less exuberant about Abenomics. Emerging countries other than China would need to invest money they don’t have in infrastructure and education. The Eurozone and other economies that are bogged down in too much debt would need to engage in “public and private sector deleveraging.”

That’s not happening. Instead, the reaction is “to use highly expansionary monetary policies to restore growth, which is ineffective, given the nature of the problems, and dangerous as it generates more excess liquidity.”

And this has not been seen since the Financial Crisis: read… The US Revenue Recession Spreads past Dollar, Energy

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  25 comments for “Global Economy Nearing a “Structural Recession”

  1. d says:

    People started developing the second and third world by stealing the first worlds jobs, and giving them to the second world, now they wonder why there are problems. In all world’s.

    This is like selling 2/3 of your farm land, so the guy don the road can have a good life, at your expense.

    Then complaining you dont have enough land to make a living from, and that you can no longer produce enough food for you, and the guy down the road, to survive on..

  2. Joe says:

    The first world business executives are driving out of the system every possible penny of cost that can be driven out of the system and they in odds against the people who decide monetary policy who want to prevent deflation at any cost. The monetary policy guys need the support of Govt guys who are controlled by the lobby guys who in turn are controlled by the business executives. Everyone is working in odds with everyone else and it is a madhouse in the first world.

  3. rich black says:

    Labor costs going up in China — problem solved

    “”As part of a major push towards automation, the first robots-only factory is being built in China’s Dongguan manufacturing hub, reducing human employees to a bare minimum.

    The factory, owned by Shenzhen Evenwin Precision Technology Co., hopes to reduce its workforce by 90%, to only 200 human workers, with the introduction of a 1,000-robot workforce to take the human’s places, according to the company’s chairman, Chen Xingqi, state-run Xinhua news agency reported.

    The automated workforce is just part of a major push to replace workers in Guangdong province’s Pearl River Delta area, where major manufacturing operations are suffering from a shortage of labor.

    The province has plans to spend 943 billion yuan ($154 billion) in the region to replace workers with robots over the next three years, the South China Daily reported. In Dongguan alone, 505 factories have invested 4.2 billion yuan in robot workers since September, with an eye to replace 30,000 workers, according to the city’s Economy and Information Technology Bureau.

    The push to automate is being subsidized by city governments who are handing out between 200 to 500 million yuan to both robot makers and to manufacturers who swap out human workers.

    Guangzhou, the provincial capital, has set a goal of automating 80% of its manufacturing production by 2020.”

    • Wolf Richter says:

      Robots are the great equalizer. They cost the same in China as in the US, Germany, or Japan. As China increases its use of robots, its cost advantages over countries like the US or Japan disappear entirely.

      This is inevitable, and as you said, it’s happening, but it won’t help exports unless China can get better with robots than anyone else.

      • rich black says:

        In the shorter term, I believe that you are correct about China’s lack of future advantage over the US and Japan, because, like China, the US and Japan can create money out of thin air in order to subsidize the increase of their country’s automation growth. Also, China, like the US and Japan (and probably South Korea), should maintain an advantage over most of the rest of the world’s manufacturing nations, that have far higher per capita external and internal debt. Germany comes to mind here.

        That said, the US has a per capita external debt more than twice that of Japan, more than eight times that of South Korea and more than twenty times that of China. The US and Japan also have far larger per capita contingent entitlement liabilities than does China. At some point in the future, one would think that the higher growing per capita debt, in countries that will see even fewer people participating in the workforce, is bound to give some kind of advantage to the manufacturing country with the lowest per capita debt. Ultimately, massively growing debts would have to put a damper on future industrial spending.

        The US, however, does have the advantage of moving towards becoming more energy self-sufficient than any of its industrial rivals.

      • Chris says:

        I love this blog Sir– thanks for all the time you spend on it and to your overseas correspondents as well.

        Thrift is the great equalizer. Not robots– that’s my deep thoughts moment of the day (by Jack Handy).

        Also, millennials (by necessity) will lead the way in showing the world the benefits of Thrift– or the obverse of gluttonous consumption. I’m astonished daily at the brilliance of these people– in general. They’re unbelievably capable (evident even when they don’t try). It took me YEARS to learn the skills I need to do my job well– these kids know it by default– it’s humbling and hilarious to see my oldest kids not far behind in that same regard. As capable as they are– they’re happy with small technology devices– they don’t want cars, houses, boats, RV’s, TV’s (what’s that??), stereos, etc. Sure I’m speaking in general terms– but it sounds about right.

        As a GenX’er, I’ve seen people like my parents and their friends work for large companies their whole lives to be unceremoniously shunted off stage when they retired. Their jobs were shipped overseas or automated to some extent. They did OK with a stable career and 401K– but I won’t patronize their former employers, nor any subsidiary either because of how they were treated toward the end of their careers. My (rambling) point being: Thrift and consumer behavioral activism will serve as potent equalizing forces, more dominant than automation, unions, lobbies, cronyism, asset bubbles, PACs etc.

        Make it a great day.

        • Petunia says:

          I speak to a millennial every day, my son. After seeing his parents lose their incomes, savings, and home, he has very interesting ideas about ownership. He doesn’t believe it exists. His peers share this detachment from owning assets, they don’t deem it important either. This is a topic that has not been tapped into but is staring us in the face. These young people stream music, movies, books, meet up and shop online. Virtual is the real world to them, and it has been their entire lives. The virtual world is a low asset world.

      • d says:

        china will never get better with robots than everybody else, as they are not the inventors, or developers of them. Simply the design and concept thieves, who can currently make them cheaper.

        Robots are going to destroy the majority of the “chinas” that build and maintain themselves, on unfairly obtained, constant trade surpluses.

        Soon it will be again cheaper, to make what “china” makes at home, than buy it from the “chinas”, then pay the huge shipping related, costs and taxes.

        Apple is building with robots back in the US, Nike, the evilest and first job exporter, is doing the same. Foxcon another exploiter is moving to “India”.

        GM (AKA O bummer Government Motors) expects Americans, without jobs, to buy Buick’s, MADE IN CHINA.

        The Robot revolution is written on the wall, for those who care to read it.

        The other main issue is that there are still at least 3 times as many people on the planet as their should be, in india and africa, the population explosion is still continuing, fueled by the muslim, 10 muslim children per woman, is good, insanity

        • Nick Kelly says:

          Don’t forget the Vatican when you refer to overpopulation. At the Population conference in RIO some years back. the Vatican and the Muslims huddled together like wall flowers at a dance.
          Of course the good news is that the Vatican dare not preach against birth control in the developed world- the congregations would walk out.
          (When the Papal Encyclical was first promulgated in I believe 1964- the Dutch bishops refused to read it from their pulpits. In earlier centuries this would have lead to yet another schism in the Roman Church but it was shrugged off)
          However in Africa the Church encourages over-population by preaching its doctrine.
          It’s something like a manufacturer dumping shoddy goods in the developed world.

        • d says:

          How could anybody who sees a population issue, forget the “Vatican”, its policy’s, and intentions.

          The vatican and muslim’s are both using the population explosion weapon, with the same intention.

          Currently muslims seem a lot better at it.

          Only 1 of them can win.

          This is not the place to start, what will quickly become an acrimonious and propaganda laden troll fest, on those policy’s and intentions, by those groups.

      • Tom Hamilton says:

        I find your use of the term “structural recession” very descriptive of what has been taking place worldwide. Central banks have been attempting to “treat” a structural recession with tools meant for a cyclical recession. It’s like pushing on a string.
        A huge contributor to the “structural recession” is based in demographics where developed world population growth has turned negative. Population growth is in all the wrong places, ie; Africa, South America, where incomes are the lowest. For great information on these demographic trends see “Hambone’s stuff” blog by my son, Chris Hamilton. He started this with Charles Biederman.

    • Nick Kelly says:

      The name of the company suggests it is an industrial machinery producer, possibly producing machine tools, lathes etc. for use by human operators. It is does not sound like it is producing consumer goods. Its products will face competition from developed economies, not Vietnam etc. and so it can compete on price.
      But as the article points out, this is not the case for most of China’s exports where it has failed to move up the value chain. A walk through Walmart will confirm this-much of the apparel is Chinese, and production of clothing and shoes has so far resisted robots. A lot of the remainder will have such short sales windows they wouldn’t be worth automating.
      Before you treat robotics as an economic holy grail, look at the stiff competition Canada’s completely up to date car plants are getting from Mexico. In the ultra competitive vehicle market, the sad story of GMs 75 cent ignition switch tells the tale. You can’t remove all the labor, and while the robots look impressive welding together the frame, there is still enough labor putting together the rest that Mexico is gaining ground solely on labor costs.
      Regarding China’s plans for automation, I suggest we treat them like the continued claim of 7 % growth.
      And we haven’t got to the question of where the laid off workers will go.

      • d says:

        GM has always been a “Quality Control ” disaster area.

        The Switch issue had nothing to do with Robots and everything to do with the Slack quality control at “O BUMMER GOVERNMENT MOTORS”.

        Apple has no issues with robots completely building very complex tower computer’s, in the US.

        Small Robots are getting better, almost by the day.

        The switch issue was a human issues, a machine does what you tell it, when you tell it, properly, unless you dont tell it properly, or keep it maintained, so it manufactures accurately.

        Robots will not replace all workers, more “Workers” will be required in QC, Maintenance, and Testing. Most of these “Worker’s” will be college or high technology trained/educated.

        Robotic Maintenance Technicians will still be workshop apprentice trained, they would also have been eligible, to go to good colleges. The Academic segments of their training, will be College Grade.

        Thew issue is, what does future society do, with all the High-school drop out’s.

  4. Paulo says:

    Declining consumer wages = declining purchases

    Declining purchases = declining business opportunities

    Declining business activity = Angry Societies

    This race for the bottom has been very short sighted. I suppose the race could go as low as no one working at anything very productive until we run out of necessary products, (and I don’t mean I- Phones….I mean plows and scythes, because that’s the way we are headed if this keeps up).

    Globalization is starting to die. Look for a resurgence of ‘managed economies’ after the upcoming violence.

    • Petunia says:

      I agree with you! All these robots will be producing for humans with no income. Either we have finally arrived at the leisure society spoken of in the 70’s, where everyone is guaranteed an income, or we will have unrest followed by collapse.

  5. MC says:

    2% growth “close to a recession”? Europe would sell her mother for half of that, if she hadn’t done it already!
    Actually Spain’s and Italy’s Goldman-Sachs alumni will uncork the champagne each time their “success stories” grow by 50 bps.

    There’s no beating around the bush: the time to pay for the frenzied growth of the past years or so, wholly built on debt, is coming. You cannot steal growth from the future indefinitely and expect no consequences.
    In fact, the time to pay for it was 2008, but by pillaging savings and destroying capital accumulation, the inevitable liquidation was put on hold. Every single piece of monetary and fiscal policy implemented in the past seven years was aimed precisely at avoiding the liquidation of malinvestment.
    But as NIRP’s in Europe have proven, the time for reckoning is drawing close. If negative rates could avoid liquidation indefinitely and guarantee constant growth, mario Draghi would have pushed rates down all the way a negative 200bps, may be more.

    I am not a “the sky is falling in” type of person, but I confess I am a bit uneasy about what’s coming.
    Financial markets do not scare me. I survived the Zaitech Burst, the Asian Crisis, the Dotcom Burst and Lehman. The world won’t end and by being careful you may not only avoid losing money but also make a little something on the side when liquidation starts. Not much, but enough for a vacation.
    What scares me is how governments and central banks will react. I have grown suspicious of them to the point of paranoia and the fact the people presently in charge belong to the same school as those who in 2008 did what they did (if they are not exactly the same persons) worries me. For seven years I have watched academics, Goldman-Sachs alumni, corporate stoogies and their ilk cause immense damages. They may have succeeded in causing asset inflation to avoid liquidation beyond their wildest dreams, but the cost was staggering.
    Main Street, from Osaka to St Louis, from Vienne to Sao Paulo, has paid the bill with no other compensation than stifling doses of propaganda.

    There are no firms “too big to fail”, no matter what paid propagandists masquerading as economists say. That’s the way of the world: no firm is irreplaceable and by studying carefully what went wrong perhaps we can avoid the same fate befalling on us.
    But rebuilding the economic texture that’s being destroyed under own eyes… that takes a lot of time and effort. In the present climate, where the small guy who pulls the cart is made to pay for both the anti-capitalist mentality so prevalent at all levels and the excesses and mistaked of those same “too big to fail firms”, it may prove an impossible task.

    One may argue Japan went from being a starving country devastated by war to being the world’s second economy in just 23 years, but times were different. For all their faults, Japanese decision makers of the times left both Japan Incorporated and Main Street work without throwing too many wrenches in their cogs.
    Present decision makers are not as wise and not as smart.

    • d says:

      The place to not have your “Liquidity/store of wealth” is where the state can see it, as they will take it, if they deem it, in “Their interest” ( Ie they need more Champagne to go with their lunch Caviar) They will have already taken your “Cake” for their rainy day.

  6. OutLookingIn says:

    The ‘Keynesian’ thought dominated global banking sector, simply believes that inflation is good because it helps the fiat debt based global financial system grow.

    While it looks at deflation as bad because it destroys debt and in a debt based system that we have, debt is money and is destroyed. This the financial system fights with all it’s Keynesian financial tools. With negative results.

    What is badly needed, is for the system to have a debt washout. Deleveraging throughout the global economy (both private and public) is required before any type of economic health can be restored. Debt reduction is drastically overdue.

    Long term Japan style economic stagnation, will be the result of the current Keynesian global banking course of action. Time to change course, but the present global political/financial power structure do not want this. As this would entail a reduction in their wealth and influence.

    So? Throw another pail of gasoline on the fire in an attempt to put it out!

  7. michael says:


    I have to agree with you. Apparantly those on the “race to the bottom” do not have children because I dont believe this is what we want to to leave to them as a legacy. This disgusts me.

    • d says:

      John Maynard Keynes.

      Who would be forced to PAY (Another generation) for the financial carnage his selfish debt driven theories ultimately will produce, were never a consideration of his.

      I have no debts, but assets, and cash, and I keep it that way. It Amazing, how little you need, to live a satisfactory lifestyle, when you have no debt. Even as I further reduce my “Taxable income”, my asset and cash reserves still keep growing, with very little effort.

      Dont get on the tread mill and keep buying bigger, and newer, cars, and house’s. Buy a second and third house/thing and make them pay all the expense on the first, as well as their own. Make sure all of this is in an asset protection entity from day 1. Then there will be no death duties, or personal tax liability’s annually, make this entity buy, own, and depreciate, every asset, you need, or have.

      Keep your personal annual tax liability as low as possible. Draw not the attention of the “States Extortionist’s”, as once it is upon you, it will never leave.

      This is what they do not teach at school, for obvious reason’s. Jewish grandmothers with big ugly numbers tattooed on their arms, however, do.

      • Retired says:

        I believe that Keynes was a ringer for the Central Bankers,the Fabian Socialists!He was just a mediocre economist who they pushed onto the world stage with dubious ideas about finance & economics.They did this by seeing to it that his theories got the widest dissemination that money could buy.Why did they recommend this obscure economist & his theories?They did it because Keynesian economics validated & supported the Central Banker’s Reserve Banking System.Keynes was brought out of relative obscurity to shill for the bankers & the Federal Reserve Bank in particular! Present day radical Rahm Emanuel was quoted as saying “you never let a serious crisis go to waste”
        There is a lot of indirect evidence that indicates that the financial panic of 1907 was a’crisis’ created & manipulated by J.P. Morgan,in collusion with the Rockefellers, to validate the creation of the Federal Reserve Bank in 1913,Keyne’s writings were used to reinforce the need for central banking.I further suspect that a similar crisis was nurtured by financial interests in October of 2008 to cause a panic which directed public anger against the Bush Administration & it’s candidate.This helped insure the election of their front man Obama in November.There was a lot of Smoldering underbrush ready to ignite into the financial crisis of 2008,the financial disaster was unstoppable no matter what else happened.The financial interests behind the Democrats manipulated the situation so that it would burst into financial flames a few weeks before the November elections,…this was their ‘October Surprise’!

        • d says:

          The nomination and presidency were undoubtedly brought for O bummer.

          I am not as convinced as you, of who did the buying, and why.

          Keynes was definitely saying what some groups wanted, thus the aggressive promotion of his deeply flawed theories.

          Again we disagree on exactly who, and why.

  8. Danny says:

    comments are spot on re: layers of personal debt.
    I Do expect to see “Bloodshed in the streets” as these thousands of ideas are over run by by their ideas

  9. Daryl says:

    I don’t buy into the notion that stimulus doesn’t work. In fact The fact is railing about stimulus is delusional. We haven’t seen true stimulus. We have seen the US treasury raped through corporate welfare as our elected officials were co-opted by modern day robber barons. Our government has allowed trillions of dollars to go down a black hole buying worthless junk created by an inept and irresponsible criminal class. Had actual capitalism been allowed to play itself out the parasites would have gone out of business, losses would have been written off and new players would have filled the void as they always have over the past 400 years. Giving actual mortgage debt relief to the masses who were duped into thinking they were getting something for virtually nothing, would have kept millions in their homes, lessened their burden creating real stimulus in the economy and probably saved millions of jobs. We’ll never know if stimulus could have been beneficial because it never happened. We have a system totally corrupted by money and sociopaths and guess what, we’ve kicked the can down the road and haven’t dealt with the underlying problem. I can guarantee this is going to turn out very bad.

    • d says:

      Stimulus can work if it is put into infrastructure or defense assets, and productive places.

      Where QE 2 and 3 went is probably better, than the entrenched handouts O bummer wanted to provide to his current and future generations, of entitlement mentality, immigrant and leftist voters.

      Unless you want 1929 -1942 x 10 or 100 you dont allow a banking system to collapse, no matter how rotten it is, or hyperinflation to develop, the long term fallout is simply to devastating.

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