Ümit Akçay
17 Şubat 2019

What’s awaiting world economy in 2019? What do the economic parameters of the major powers and the “emerging markets” indicate? Which phases of crisis will Turkey face before and after the local elections of 31 March 2019? What are the options of the labour movement? A projection for 2019 by Ümit Akçay, associate professor at Berlin School of Law and Economics.

The main motto of the global neoliberal technocracy and the international mainstream outlets at the beginning of 2018 was that it would be a year of “synchronized growth”.[1]

The term “synchronization” implied a possibility of economic growth for most countries for the first time since 2007.[2] The turmoil in the US stock markets at the beginning of 2018 led to the suspicion that these expectations were in the nature of wishful thinking.

The global outlook for 2019 does not look bright, either: indeed, we may be on the verge of a new global economic stagnation. Thus, synchronized slowdown and solo crises may characterize 2019.

In the second half of 2018, international economic institutions published their reports on the global economic outlook of 2019. The OECD report, which includes the most up-to-date data, indicates that the global economic activity slowed down in 2018. In particular, the decrease in industrial production and retail sales were evident.

Moreover, trade decelerated. Accordingly, there were sharp decreases in the purchase orders of global exporters such as Germany and China. Another indicator for the slowdown in global trade was the decrease in container shipment.

In short, the OECD predicts that the world economy will be gearing down rather than strongly growing in 2019.[3]

OECD predicts that the world economy will be gearing down in 2019. German economy faced a contraction in the third quarter of 2018, for the first time since 2015

Brexit and the political crises

Europe’s major countries are struggling with political crises at the beginning of 2019. Britain has reached the final stage of the Brexit process ongoing since 2017. However, the consensus between the European Union (EU) institutions and Theresa May government convinced neither the Conservatives nor the Labor Party.

In particular, the result of the vote of confidence about May’s leadership in the Conservative Party, which she won by 200 to 117, on 12 December 2018 was an indicator of how much the party was divided.[4] Although May temporarily secured her leadership, it will be difficult to get the current draft approved by the UK parliament, if there are no changes made as a result of the negotiations with the EU institutions.

In short, 2019 will be a critical year for the UK in many ways. How the Brexit process will take shape will determine the future of the UK and the EU relations. It may also trigger a series of developments in which the Labor Party, led by Jeremy Corbyn, may find an opportunity to come to power.

Political change begins in Germany

If the UK leaves the EU in 2019, Germany will have more say in the future of the EU. The domestic developments in Germany, however, have led Angela Merkel, the only political leader to remain unchanged after the 2008 crisis, to announce her stepping down. The far-right AfD’s entry into the parliament and the anti-immigrant demonstrations in Chemnitz were indications that the political center in Germany has been melting. In this political environment, where the Social Democrats faced historical defeats, there was also a rapid erosion in the social support for the Christian Democrats.

As the center shifted to the right, the AfD became almost a mainstream party. As per the voters who moved away from the Social Democrats, the Greens were the primary preference. Political uncertainty has increased after Merkel’s announcement.

In 2018, this uncertainty in politics was coupled with economic problems. Germany, a strong economy that continued its growth after the global financial crisis, faced a contraction in the third quarter of 2018, for the first time since 2015.[5] Experts claim that the shrinkage was due to the scandals in the automotive sector, but even so very few of them are predicting a bright year with economic growth in 2019.

We’ve seen the ”Syriza Paradox” in the Italian case, which means it’s hardly possible to oppose the austerity policies from within the EU. It would not be surprising, if the developments in Italy in 2019 affect the Eurozone negatively.

Italy and the EU: The budget crisis

One of the developments that marked 2018 was the right-wing Lega and the Five Star coalition running Italy. The most important challenge the new government, which brought up the issue of equally sharing the cost of hosting the refugees across the EU, encountered was the disapproval of its budget by the EU Commission. This incident, a result of the mechanisms introduced to predict macroeconomic imbalances in the EU after the 2008 crisis, took place for the first time in the history of the EU.[6]

Even though the budget crisis was solved by concessions of both parties, it revealed that an economic policy other than austerity cannot be implemented within the EU. In this context, we’ve seen the ”Syriza Paradox” in the Italian case, which means it’s hardly possible to oppose the austerity policies from within the EU.[7] It would not be surprising, if the developments in Italy in 2019 affect the Eurozone negatively.

Macron is failing

For Emmanuel Macron, the leading advocate of center politics in Europe along with Merkel, 2018 was the most difficult year of his political life. His first step as the president was to initiate a new labour market reform programme similar to that of Gerhard Schröder’s in the early 2000s. Macron’s programme also included tax cuts for corporations and the rich, similar to Trump’s. Recent tax regulations and fuel price hike were the final straw for those whose social rights and incomes have been deteriorating since 1980s under the neoliberal policy regime.

In this context, the movement of the Yellow Vests emerged as an objection from the wider community, whose economic situation was increasingly deteriorating. The Yellow Vests, accusing Macron of being the president of bankers, set out as an opposition to Macron’s tax changes, reached its peak in the first week of December 2018 and caused Macron to take a step back.[8]

Macron’s concessions to the Yellow Vests movement can be seen as an act to gain time for he didn’t have an intension of a significant change in his economic policy. It’s still uncertain whether France will be confronted with the effects of the global crisis and the widening income inequalities. What is certain, however, is the collapse of the political centre in France.

It is worth noting the two most important developments of 2018 for Europe. The leaders representing the liberal European order and the centrist politics have lost their strength, and the predictions of economic stagnation have become routine. In this context, the European Central Bank (ECB) announced in December 2018 that it has ceased its four-year programme of quantitative easing,[9] and it seems quite difficult for the ECB to raise the interest rate in the short term.

Chinese economy downgraded

Chinese economy is the second largest one in the world, therefore the developments in its economy is also crucial for the global economy in 2019. China’s long-standing high economic growth performance began to slow down subsequent to the 2008 crisis, especially after 2013 when global liquidity declined. Chinese policymakers took some steps against this slump. They accelerated infrastructure investments against the slowdown in investment expenditures, lowered interest rates against the credit shrinkage, took measures to revitalize the economy, reduced taxes to increase consumption, and devaluated the national currency against the USA’s newly increased tariffs and border taxes.[10]

The future of housing projects, which are an important part of the intensive investment programmes against the economic slowdown, is a significant source of risk not only for the Chinese economy but the world economy as well. As of last year, the ratio of unoccupied houses in China exceeded 20 percent. That is 50 million vacant houses.[11] This problem has emerged out of a tendency of purchasing houses for investment purposes to benefit from the increase in housing prices, may turn into an economic crisis, if the housing prices begin to decline. In short, the slowdown in Chinese economy will continue to be a key indicator for both China and the world economy in 2019.

The US: On the brink of a new crisis?

For the US economy, 2018 was a year when unemployment was historically low and economic growth continued. In particular, President Donald Trump’s tax cuts for corporations and new deregulation measures for the financial sector had a positive impact on economic growth in the short term. Nevertheless, the moderate recovery in the US economy after the 2008 global financial crisis has some interesting aspects.

Firstly, robust wage increases are not taking place even though there is almost full employment in the labour market. The decline in the unemployment rate after the crisis was affected by the decrease in the labour force participation rate. Especially those, who were laid off during the 2008 crisis and were over middle age have been gradually pushed out of the labour market. On the other hand, the employment of those, who found jobs with lower wages and shorter-term contracts after the crisis resulted in continuation of the deflationary pressure in the economy.

As Fed’s ex-president Jannet Yellen pointed out in a December 2018 statement, the gigantic gaps already existing in the system have become larger as a result of deregulation practices, and the likelihood of a new financial crisis has increased. There are even more grievous aspects of the matter.[12] Foremost, the “new financial architecture”, which was the causative factor of the global financial crisis is still in practice.

The Fed insists on raising the interest rates for it seeks to diversify its instruments for the next financial crisis. The Fed is now boosting the interest rates only to reduce them in the future.

In other words, the mechanism which triggered the crisis remains unchanged. In particular, the problem of managing the non-financial companies’ debts, booms in the stock market and housing prices, as a result of the ongoing monetary policy, increases the possibility of a new financial crisis.

Under these circumstances, the Fed’s attempts for “normalizing” its monetary policy may come to an end, meaning 2019 will not be a year of implementing aggressive rate hikes for even the Fed, though a few interest rate boosts are still expected in order to prevent a new financial collapse.

Despite the fact that inflation has not recovered strongly, the Fed still insists on raising the interest rates for it seeks to diversify its instruments for the next financial crisis. That is to say, the Fed is now boosting the interest rates only to reduce them in the future.

Regardless, the next potential economic crisis can be more devastating than the previous one. There is a simple reason for this: the monetary policy has become dysfunctional. The Fed’s capacity to intervene in the case of a new economic crisis is substantially hindered because the policy rate is nearing to the verge of negative interest rate, and the central bank balance sheets are increasing significantly.

The status of the fiscal policy is also worse than that of the 2008 crisis. The reason for this is that due to the stagnated economic growth and the transfer of private company debts to the public after the crisis, the ratio of budget deficits and public debt to national income has increased in many countries.

Finally, when we review the business cycles that are historically experienced in the US economy, the period between 2009 and 2018 is the longest uninterrupted growth period. However, since this unparalleled growth process will not last forever, the extension of economic growth periods mean that we are getting closer to the next crisis.

In short, a new economic crisis in the US economy means that the world economy will enter an unchartered territory, while the limitations posed by the previous crisis on monetary and fiscal policy have not yet been lifted.

Emerging markets in decline

2018 was a year of decline for the emerging market economies. The risk of economic slowdown in India and Brazil was accompanied by the rise of the extreme right-wing politics. Argentina and Turkey, on the other hand, experienced a worse situation: economic crisis.[13]

2019 will be a difficult year for economies whose economic growth are mostly depending on capital inflows. The prospects for a stagnation in Europe, as well as the concerns regarding a new financial crisis in the US, may prevent the central banks from steeply increasing the interest rates, which could result in loosening the already shrinking global liquidity. If a partial monetary loosening of the global liquidity materializes, then countries such as Turkey would have an opportunity to postpone their economic difficulties, owing to the continuation of capital inflows.[14]

On the other side of the coin, if there is a slowdown or even a stagnation in the mature capitalist countries, it is hardly possible for the emerging market economies not to be adversely affected. Particularly, if export does not grow fast enough in 2019 as it did in the previous year due to the large depreciation of national currencies against the US Dollar, the situation will be devastating for Argentina and Turkey.

Dependent financialization: a dilemma of policymakers

Turkey’s economy has slipped into a recession in the midst of intensified adverse global economic conditions for the emerging capitalist economies. The financial crisis of 2018-2019 in Turkey is the crisis of dependent financialization.

The concept of dependent financialization describes economies that have a high dollarization rate, a production structure that depends on imports, and an economic growth that depends on capital inflows. The dependent financialization of Turkish economy brought about a dilemma for policymakers: lowering interest rates for economic growth triggers currency shocks.

As a result of currency shocks, inflation becomes harder to manage. The policymakers are forced to increase the interest rates again to control the inflation, which most likely causes an economic slowdown.

Severe hikes in foreign currency in May and August resulted in a currency crisis in 2018 in Turkey. This can be seen as the first phase of the crisis in the Turkish economy.

The currency shocks in May and August resulted in the currency crisis in 2018 in Turkey. This can be identified as the first phase of the crisis in Turkish economy. The second phase is the rapid increase of inflation. After March 31 local elections, a rigid austerity program may become the third phase of the crisis.

The second phase consists of the rapid increase of inflation emerging as a result of the spreading effects of the currency crisis on the economy and a series of company insolvencies. In addition, a significant interest rate hike in September led to a major economic downturn, particularly in the TL-denominated credit market. The first months of 2019, which is before the local elections, will coincide with the second phase of the crisis.

The next phase of the crisis will be reached after the clarification of how the costs of the crisis will be distributed horizontally and vertically among the social classes. For the time being, policymakers have not made a clear choice regarding who will bear the burden of the crisis: banking capital or industrial capital; large capital or small capital groups.

These choices would be unrealistic for the government before the local elections, because they would simultaneously cause consolidation and liquidation of companies. Therefore, after 31 March 2019, a harsh austerity program may constitute the third phase of the crisis.

The course of the crisis in Turkey will be determined by both inter- and intra-class struggles and international economic conditions as briefly summarized above. Policymakers’ main expectation from 2019 is the revival of the post-2008 crisis period. That is to say, the crisis in the mature capitalist countries may create new economic growth opportunities for countries such as Turkey. However, aforementioned potential of economic stagnation or even a recession in the EU would also mean the narrowing of Turkey’s most important export market.

The vacuum in the centre

2018 began with the expectation of a synchronized economic growth in the mature capitalist countries but we’ve seen that this positive climate has disappeared by the end of the year. In 2019, we will probably witness a synchronized global slowdown accompanied by solo country crises. The most predictable candidates to face such solo crises are Turkey and Argentina.

Moreover, the risks that are increasingly concentrated in the European and the US economies indicate that 2019 will be a painful year for the world economy. Maintaining neoliberal economic policies, which themselves were causative in the outbreak of the crisis, resulted in the collapse of the political centre all over the world. It is hardly possible for the centre-right and centre-left parties –having almost the same economic program– to overcome the discontent shared by the many in various countries.

The left-oriented social movements, which developed in the immediate aftermath of the 2008 crisis, failed to achieve serious gains and were soon withdrawn. In recent years, we have also encountered the rise of right-wing populist movements. In the wake of the collapse of centrist politics, the struggles between different theoretical and political standpoints of the left and the right will intensify in 2019. 

The prospects of labour movements

Economic slowdown in major capitalist countries, and recessions in some emerging capitalist countries like Turkey and Argentina hasn’t brought about a rise of the left-wing politics since the great recession of 2008. Exceptional cases like in Greece, where the left had risen and even came to power, often ended with a devastating defeat.

There can be many reasons for these defeats, and the social democrats’ embracement of neoliberalism is definitely foremost among them. Italian social democrats are the latest sample of this. During the latest conflict between the Italian government and the EU Commission about the Italian budget, social democrats basically defended the international financial investors’ interests.[15]

It’s getting increasingly difficult for the many to revolt for they try to close the gap between their income and expenses via debt. Thus, debt is becoming a means of social discipline.

There are more structural reasons for the left’s inability to rise, in addition to the its failure in formulating alternative economic policies. In fact, the most important result of the neoliberal policies, which have been practiced for almost 40 years, has been the weakening of the labour movement through the use of force and market relations. For instance, it’s getting increasingly difficult for the many to revolt since they try to close the gap between their income and expenses via debt. Thus, debt is becoming a means of social discipline.

Despite these negative circumstances for the labourers, there are still some alternatives. Neoliberal policies are still considered as dominant ideologies by the global economic technocracy and/or the policymakers, but in many countries their credibility is increasingly diminishing in the eyes of the majority. The collapse of centrist politics is one of the consequences of this loss of credibility. What is important at this stage for the left is strengthening international solidarity, especially in areas such as the EU or Latin America, and the formulation of a viable alternative economic model.

In Turkey it is not difficult to predict that 2019 will be a tough year for the working classes. In the case of the dramatic rise of unemployment and the persistence of high inflation, a mass labour struggle may emerge. However, as in the case of the airport construction worker resistance in Istanbul in 2018, when a revival potential in the labour movement emerges, the state doesn’t hesitate to suppress it with the harshest measures.

When one considers the threats of the Turkish government regarding the potential emergence of a pronounced discontent similar to the Yellow Vests, it becomes obvious that the government will not tolerate such possibility. Indeed, this will be the basic dynamic of the current regime’s further authoritarianism in the coming period.

Overcoming this oppression can only be possible with the political will to build a strategy that can combine the struggle for bread against crisis, and the struggle for democracy against the authoritarianism.

[1] Eshe Nelson ve Dan Kopf, ‘The economic buzzword of 2018 is “synchronous”’, Quartz, 31.01.2018. 
[5] Angela Monaghan ve Larry Elliott , “German economy shrinks for first time since 2015”, The Guardian, 14.11.2018.
[6] Ümit Akçay, “İtalya ile AB Arasındaki Bütçe Krizi”, Gazete Duvar, 25.10.2018.
[7] Ümit Akçay, “İtalya ve Neoliberal Avrupa’nın Krizi”, Gazete Duvar, 29.05.2018. 
[9] Carolynn Look, “ECB Ends Historic Stimulus Push”, Bloomberg, 13.12.2018. 
[10] Gabriel Wildau, “China’s response to its slowing economy and the trade war”, Financial Times, 07.12.2017. 
[13] Ümit Akçay ve Ali Rıza Güngen, “Lira’s Downfall is a Symptom: the Political Economy of Turkey’s Crisis”, Critical Macro Finance, 18.08.2018.
[14] Ümit Akçay, “Beş Soruda 2018-2019 Ekonomik Krizi”, Gazete Duvar, 13.12.2018. 
[15] Express, “interview with Andrea Fumagalli”, Winter 167, p. 29.