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A perfect economic storm

The Bank of England and the European Central Bank kept interest rates steady this week, despite pressures for a cut to boost economic activity. The central banks were paralysed by contradictory movements in the global economy that render them helpless.

As everyone knows, prices are rocketing, and the things that hit most people hardest are rising the fastest – food, housing, fuel for heating and travel. Lowering interest rates would add to inflationary pressures. At the same time, growth, the one thing that is the essential measure of the health of the capitalist economy, is turning into its opposite - recession and slump.

Amongst the world’s most powerful global corporations car makers, Ford, General Motors and Chrysler are shutting some of their most productive factories as demand for fuel-hungry models evaporates. Ford is slashing salaries by 15%, delaying agreed wage increases by three months, ending training programmes, putting a $25,000 limit on life insurance payouts, and sacking as yet unknown thousands of its employees.

The airline industry is shrinking fast. Silverjet, the UK all-business class airline last week suspended all flights. In the US, Credit Suisse analyst Daniel McKenzie expects 2009 domestic capacity “will be in line with where it was in 1998 to 1999, essentially wiping out 10 years of growth for the legacy carriers.” Continental Airlines is cutting 3,000 jobs and taking 73 aircraft out of service. United Airlines is grounding a fifth of its fleet.

According to Giovanni Bisignani, director general of the International Air Transport Association, “oil skyrocketing above $130 per barrel has brought us into uncharted territory. Add in the weakening global economy and this is yet another perfect storm.” Bisignani said 24 airlines had gone bankrupt in the past six months and the sector faced $99bn of extra fuel costs in the year ahead. He describes the situation as “desperate and potentially more destructive” than the setbacks the industry had faced in recent years from terrorism, economic slowdown, the outbreak of Sars [severe acute respiratory syndrome] and the war in Iraq.

Despite all of this, shares in airlines have risen. Investors smell profits when companies take action to cut costs. Proponents of the market economy see all this as a necessary shake-out and some are looking for opportunities to revive the economy through new ventures linked to the climate crisis. Ken Lewis, chairman and chief executive of Bank of America, has called for governments to intervene to help accelerate the movement towards renewable energy sources. He says “there is a strong connection between our willingness to diversify our energy sources and our ability to grow the global economy sustainably.”

What’s the betting he was part of the lobby that ensured the US delegation blocked any acknowledgement of the impact of the switch to biofuels on food prices at the UN’s food crisis summit yesterday?

The economic crisis is sharpest in the US and Britain – the two countries weighed down by the largest amounts of debt. Both countries are in a deadly race, to see which one is actually the weakest link in the global capitalist chain and breaks first. Judging by this week’s deeply pessimistic OECD forecast, accompanied by plummeting house prices and consumer spending, Britain could well be in first place.

Gerry Gold
Economics editor
6 June 2008

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