By Gökalp Erbaş
The economic hardship of Western countries, especially the USA, is no longer expressed only by Asian experts. This situation has also started to be frequently mentioned by people and institutions that have important positions in the media, finance and ideological pillars of Western hegemony. We will examine some of the most important of these numerous confessional statements, news reports and analyses from the West.
Debt and economic recession in the USA
One of the most important indicators of the state of the US economy is the huge increase in debt levels. The Telegraph’s Evans-Pritchard reveals that the US budget deficits at the federal, state and local levels have grown to an unprecedented level. He predicts that this uncontrolled debt will eventually lead to a global collapse. This level of debt makes US bonds less attractive to other countries, and as a result, US bonds are being sold off. If this process continues, the dollar-dependent financial system could also be radically altered, with the destruction of credit contracts linked to US debt proceeds. The decline in the share of the US Treasury market held by foreign central banks from 25 per cent in 2019 to 14 per cent in 2024 suggests that the process has already begun. (1)
The Economist is much more pessimistic about debt. Noting that the US net national debt has risen from 40 per cent of GDP in 1990 to 98 per cent, the analysis says that the US budget deficit will reach 6.5 per cent of GDP in 2024. However, The Economist notes that Congress has not addressed this problem urgently, and that the problem is getting worse with defense spending, green energy and industrial policies. (2)
Business Insider’s Edwards, on the other hand, evaluates the increase in unemployment rates in the US in the context of Claudia Sahm’s recession indicator and says that the US economy is on the decline. The model is reliable as it has been tested in the last nine recessions of the US. However, unemployment notifications are around 250 thousand people. According to Essaye, if this figure reaches 350,000, the alarm bells will ring. (3) Another worrying statistic is the childbearing rate in the USA. The New York Times reports that 67 per cent of women and 50 per cent of men in the country do not want to have children. (4)
According to Dendrinou from Bloomberg, all of this, coupled with the drastic interest rate hikes to curb inflation, is making it much more costly for the government to keep debt on the table. Something unprecedented has happened in this fiscal year: the annual budget deficit has increased by 31 per cent over last year to more than $1 trillion due to the interest burden on the US’s outstanding debt. Total debt now stands at more than $35 trillion. (5)
Another side effect of the debt crisis and recession fears is seen in bankruptcy filings. According to S&P Global, one of the most important credit rating and financial analysis companies in the US, bankruptcy filings in the US have reached the highest level since 2020, when the peak was seen due to the pandemic. The largest share of bankrupt companies is in companies that market discretionary consumer goods. They are followed by companies in the industrial and healthcare sectors. (6) To some extent, the IMF also shares the concerns about debt. Pierre-Olivier Gourinchas, chief economist of the IMF, considers the US fiscal stance, which is constantly increasing its debt-to-GDP ratio, as ‘worrying’ and ‘risky for both the domestic and global economy’. (7)
Does excessive debt mean crisis?
We witness that Trump frequently uses the terms decline and collapse when talking about the US economy in his speeches. Elon Musk, one of Trump’s most famous supporters, has also stated that America is going bankrupt at a rapid pace, with interest payments on the national debt exceeding even the defense budget, which has reached 1 trillion. (8) Western experts, on the other hand, approach this situation from multiple perspectives.
Berezin explains in the Financial Times why investors should prepare for a recession with a few comparisons. Firstly, he notes that the vacancy rate has fallen sharply. In early 2022, we were seeing a ratio of two vacancies for every unemployed person, meaning that it was fairly easy for someone to find a job, preventing the threat of unemployment. Now job vacancies have fallen considerably. He says that this decline in the employment rate will also reduce consumption in the future.
Secondly, he says, there are clear signs of weakening in the housing market. Housing sales are declining, housing licenses are standing still. The number of houses under construction has fallen by more than 8 per cent since the beginning of this year. ‘if housing construction continues to weaken, we will see a wave of lay-offs in that sector’ he adds. In addition, he says that the number of vacant offices is increasing, default rates in the commercial real estate market are increasing, and regional banks that lend for this business (CRE lending) will suffer huge losses. In this case, he predicts that the FED will cut interest rates by more than 2 per cent and the economy will enter recession (9)
Jamie Dimon, CEO of JPMorgan Chase, the largest bank in the US, emphasizes that the US economy faces a threat of stagflation that goes beyond recession and should not be dismissed out of hand. Stagflation means the slowdown in economic growth that the US experienced in the 70s, the collapse of the stock market, the increase in inflation and unemployment, and the decline in retirement savings. (10) It is also worth noting that in J.P Morgan’s analyses, the recession expectation in the US is 35 percent for the end of 2024 and 45 percent for the end of 2025. (11)
Heather Long, writing in The Washington Post, says that the US economy is not currently in a recession, but the probability is high. Although Long thinks that the FED can prevent a recession by following the right policy, what she conveys about the current situation is worrying. Long states that low-income people can hardly afford to live now, they have no money left in the last days of the month. It adds the record credit card debt of Americans. The observation that it is now very difficult for the labor force without a university degree to find a job is also repeated here. (12)
Signs of collapse or a transition period?
It is worth noting that there are experts who approach these indicators of the US economy differently. UK-based RSM International, one of the world’s largest financial advisory networks, explains that the American economy will not enter a recession on seven points. According to RSM, there is nothing to worry about because all world economies are in a slowdown due to the effects of the pandemic, the Ukrainian war and competition with China. However, the US economy has averaged 3% year-on-year growth in real gross domestic product in the last four quarters, and the domestic economy is experiencing a post-pandemic productivity boom. As for the unemployment rate, they state that the level is still historically very low, and they also emphasize the change in labor markets. Production efficiency has increased much more than in previous years, making it harder for less educated, low-skilled citizens to find jobs. It is therefore normal for unemployment to rise at this level during periods of investment in productivity.
In order to maintain a competitive edge over the rest of the world, the US is also investing heavily in infrastructure, the impact of which will be seen in the future. The global demand for crude oil is also declining and fuel prices are expected to normalize soon if demand falls. In addition, the generation with the highest home ownership rate is now in its 70s, and the housing crisis will soon be alleviated by the transfer of wealth to the next generation. Finally, RSM predicts that household income and consumer spending will be boosted by increased defense spending around the world, from which American arms companies stand to make huge profits. (13)
The possibility that the fall in oil prices will reduce the risk of a possible recession is voiced by other experts. According to Ed Yardeni quoted by Business Insider, this situation, which will mean cheaper energy, can contribute to the economy by reducing costs in production, construction and agriculture. (14)
Where is the European Union in this crisis?
It can be said that the economic problems are not only limited to France and Germany, but also spread all over Europe. According to the Financial Times, the EU will cut its diplomatic budget by €43 million next year. It is stated that a cut of this scale may lead to the closure of some EU missions in distant countries due to the inability to cover the costs. (15)
A recent review by Cerderio, Hong and Kammer on the IMF Blog also highlights some of the weaknesses of the European economy, especially compared to the US. (16) While the market capitalization of US listed companies has more than tripled since 2005, those in Europe have grown by only 60 per cent. While the productivity of US technology firms has increased by around 40 per cent since 2005, it has not even increased significantly for European companies.
Europe’s weakness in the face of the US and China is also being discussed in the European Parliament. Mario Draghi, former President of the European Central Bank, presented an updated report on European competitiveness to the Parliament. Draghi told MEPs: ‘Europe faces a choice between exit, paralysis or integration’. According to Draghi, Europe faces three critical challenges: To close the huge innovation gap with the US and China, to chart a new path that combines a decarbonization plan with the goal of increasing competitiveness and, most importantly, to reduce dependence on foreign economic powers. (17) This is in line with what Toth, State Secretary of the Hungarian Ministry of Finance, said in Bloomberg. ‘If this kind of growth gap increases continuously until 2030, the gap between the United States and the European Union will be as big as the gap between Japan and Ecuador today,’ Toth said. (18)
The Financial Times, which also covers Draghi’s report, quotes an important emphasis of the report. ‘The bloc has lost Russia, its most important supplier of cheap energy. Above all, it is entering an era of geopolitical conflict, where economic interdependencies risk turning into vulnerabilities.’ (19) In an interview with CNBC, Gentiloni, the European Commissioner for Economic and Financial Affairs, acknowledges the situation but seems a little more hopeful. Gentiloni acknowledges the very low growth rates, the declining competitiveness, the challenges posed by the Ukraine war and the pandemic, but says that the ‘prophecies’ for Europe, such as recession, disruption and fragmentation, have not happened. (20)
Is Germany becoming deindustrialized?
According to the Frankfurter Allgemeine Zeitung, German Finance Minister Lindner sent a letter to the Ministry of Defense. According to the budget planning in this letter, due to the ‘austerity measures taken by the Chancellery and the Ministry of Finance’, Germany will provide the agreed military support but will no longer provide any new financial aid to Ukraine. The main reasons for this disagreement between Finance and Defense within the government are political forces within Germany, such as the BSW, AfD and CDU, which oppose aid, and economic difficulties. (21) The biggest debate about the German economy is the deindustrialization of Germany. According to the June report of the German Chamber of Industry and Commerce, the majority of German companies think that the ‘energy transition’ policy has a negative impact on them. The report is also important in that it contains a statement frequently voiced by the opposition parties: ‘The deindustrialization of Germany has begun and we feel as if no one is doing anything about it.’ (22) The symptoms of the German economy’s difficulties are not limited to these. With €34 billion in debt, Deutsche Bahn (DB), the German railway operator, whose disruptions and constant delays on the railways have become a matter of mockery, was forced to sell its logistics subsidiary to a Danish company. (23)
Bloomberg’s report on Germany also reveals other signs. Commenting on the decline in the S&P Global Purchasing Managers’ Index in July, Cyrus de la Rubia, chief economist at the Commercial Bank of Hamburg, says that the weakness in the German manufacturing sector will continue and that no growth is expected until at least autumn. The reasons cited include a decline in business activity, high energy prices, the gradual loss of global market share by German car and equipment manufacturers due to competition from China, labor shortages and a lack of investment. (24)
How temporary these problems are for the German economy is also a controversial issue. Mark Schroers at Bloomberg claims that structural reasons are more effective. He notes that industrial production in Germany fell by 2.4 per cent in just one month from June to July. According to the report published by Germany’s economic research institute IFO on 5 September, the growth forecast for the total of 2024 is zero percent. The 2025 forecast is 0.9 per cent. The Kiel Institute for the World Economy forecasts a contraction of 0.1 per cent. Although Schroers says that a recovery in the manufacturing sector will revive the German economy, Volkswagen’s statements that it has 500,000 vehicles and plans to close some factories in the country suggest that the automotive sector cannot save the economy. (25)
The French Le Monde quotes Nils Redeker as summarizing the state of the German economy in a few sentences ‘Some factors are temporary, of course, but growth has been flat since 2018, productivity growth is bad, demography declines and there is massive under-investment in private and public sectors. (…) Germany is the industrial base of Europe. If it weakens, the entire continent will suffer the consequences.’ (26)
‘France is hardly in a position to be giving lessons’
Eric Albert writes in Le Monde that France is in no position to give lessons on budget management with its ever-growing budget deficit, which is expected to reach at least 5.6% of GDP this year. He also mentions France’s mediocre economic performance and the deteriorating quality of public services. (26)
There are strong indications of economic difficulties in France. Pensioners in particular have great difficulty in meeting even basic living expenses. According to figures from the French Ministry of Labor, Health and Solidarity, the labor force participation rate of the elderly category, which covers the 55-64 age group, has increased from 32% in the early 2000s to 56.2% in 2021. (27) Bloomberg also notes that the French business confidence index has declined to a level not seen since the pandemic, there is a sharp decline in expected demand in the service sector and industrialists are hopeless. (27)
The New York Times also reports on France’s debt problems. France’s debt burden has reached €3 trillion, more than 110 per cent of gross domestic product, the highest in Europe after Greece and Italy. At €154 billion, the economic deficit amounts to 5.5 per cent of economic output. Around 80 billion euros a year are spent on paying interest on the debt alone. In the worst case scenario, France could find itself without a budget for 2025 and, at least on paper, unable to pay its civil servants, the report says. To avoid sanctions from Brussels, France must steadily reduce its budget deficit to 3 per cent by 2027. Standard & Poor’s downgraded France’s sovereign debt rating and Moody’s could do the same if the ‘political gridlock prevented the government from passing a belt-tightening budget’ is not resolved. (28)
Conclusions
In Western sources, the economic situation in the US and the EU is sometimes portrayed in a radically negative light and sometimes in a way that recognizes the gravity of the situation but does not paint a hopeless picture. The situation in Europe, however, is often described as much more critical than that of the US. Although there are some analyses of the US economy that try to explain that there is no crisis, it is difficult to find a positive view of the current situation in Europe, except for analyses that offer hope and solutions with specific strategies. Moreover, the Draghi report submitted to the European Commission, from which we have included quotations, shows first-hand that European leaders have also grasped the situation and are looking for ways out. The biggest problem for both the US and the EU is the growing excessive debt situation. In addition, Europe seems to be much more adversely affected than the US by China’s competitive advantage, record increases in defense budgets, and the disruption of access to cheap energy due to the Ukraine war. However, the US economy is also threatened by the process of de-dollarization, exemplified by China’s divestment of large amounts of US bonds and the increasing number of countries around the world turning to gold reserves to avoid dollar hegemony, as well as the possible large-scale barter trade between China and Eurasian countries.
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