Many indicators are now pointing towards a global downturn in the economy, along with paradigm shifts in demand patterns. CEOs need to urgently build resilient business models to survive and prosper in this New Normal world, as I discuss in my 2019 Outlook and video interview with ICIS.
Global recession is the obvious risk as we start 2019. Last year’s hopes for a synchronised global recovery now seem just a distant memory. Instead, they have been replaced by fears of a synchronised global downturn.
Capacity Utilisation in the global chemical industry is the best leading indicator that we have for the global economy. And latest data from the American Chemistry Council confirms that the downtrend is now well-established. It is also clear that key areas for chemical demand and the global economy such as autos, housing and electronics moved into decline during the second half of 2018.
In addition, however, it seems likely that we are now seeing a generational change take place in demand patterns:
- From the 1980s onwards, the demand surge caused by the arrival of the BabyBoomers into the Wealth Creating 25 – 54 cohort led to the rise of globalisation, as companies focused on creating new sources of supply to meet their needs
- At the same time the collapse of fertility rates after 1970 led to the emergence of 2-income families for the first time, as women often chose to go back into the workforce after childbirth. In turn, this helped to create a new and highly profitable mid-market for “affordable luxury”
- Today, however, only the youngest Boomers are still in this critical generation for demand growth. Older Boomers have already moved into the lower-spending, lower-earning 55+ age group, whilst the younger millennials prefer to focus on “experiences” and don’t share their parents’ love of accumulating “stuff”
The real winners over the next few years will therefore be companies who not only survive the coming economic downturn, but also reposition themselves to meet these changing demand patterns. A more service-based chemical industry is likely to emerge as a result, with sustainability and affordability replacing globalisation and affordable luxury as the key drivers for revenue and profit growth.
Please click here to download the 2019 Outlook (no registration necessary) and click here to view the video interview.
President Trump’s auto trade tariffs are bad news for the US and global auto industry, as the chart highlights:
- It shows H1 sales in the 7 major markets, which account for 87% of global volume
- Sales in China have risen nearly 4x since 2007 from 3.1m to 11.8m this year
- Sales in the other 6 markets are almost unchanged at 23m versus 22.1m in 2007
Formerly high-flying growth markets such as Russia and Brazil have disappointed. Even after this year’s recovery, their H1 sales were still 35% – 39% below their 2011 peak.
Growth in the mature markets of the USA, Europe and Japan has only been achieved via $tns of stimulus programmes, which have left all 3 areas with vast debt burdens. Now, of course, higher interest rates are causing sales to slow again.
Only China – and India, with its very young population and relatively cheap prices – has seen steady sales growth.
Equally important is the global nature of the auto industry supply chain, where parts manufacture is as important as final assembly. And as the New York Times reports:
“General Motors now sells many more cars in China than it does in the United States, and the largest exporter of cars from the United States by value is not an American brand, but BMW. By some calculations, the car with the highest proportion of United States and Canadian-made content is the Honda Odyssey — and even that includes roughly a quarter of foreign-made parts.”
The sanctions couldn’t have come at a worse time for the US industry, where domestic steel and aluminium users are already suing the Administration over Trump’s earlier tariff decisions. Higher prices will only accelerate the current decline in domestic auto demand, which is being hit by 2 major negative trends.
THE AVERAGE AMERICAN IS NO LONGER DRIVING MORE MILES EACH YEAR
The second chart highlights the key longer-term issue, that Americans are driving less each year:
- It shows annual US vehicle miles/adult versus the $/gallon gasoline price since 1970
- Historically, Americans tended to drive more each year, unless gasoline prices rose sharply
- Average miles driven rose from 8k miles in the 1970s to 11k miles in the 1980s, and 13k in the 1990s
- The BabyBoomers (born 1946-64) were moving out to the suburbs and having children – so the “automobile was king”
- Higher prices during the 1973-5 and 1980-85 oil crises slowed the trend, but didn’t change it
But in 2001, the oldest Boomers became 55, when people leave the Wealth Creator 25 – 54 age group which drives economic growth. Average miles per adult peaked in 2004 at 13.3k miles and have since fallen by 1k to the current 12.3k level. Mileage is back at 2011 levels, when gasoline prices were a third higher at nearly $4/gal.
The issue is that the ageing Boomers no longer have to drive to work each day, or provide a taxi service for their children. And car ownership is no longer a key “rite of passage” for younger Millennials. New business models (eg Uber/Lyft services and car-sharing) are far more affordable, given the high costs of car purchase and insurance.
USED CAR SALES ARE SET TO GAIN, WITH AUTO DEBT AT NEAR-RECORD LEVELS AND INTEREST RATES RISING
The third chart confirms how US auto sales have become dependent on rising levels of debt:
- It shows average auto loans based on the total over-16 age population (most Americans can drive from 16)
- The average loan was already rising in the Boomer-led SuperCycle, with each peak higher than before
- But the Fed’s subprime and QE bubbles have caused it to accelerate
- In 2006, it averaged $4k at the height of subprime bubble; since the crash, it has risen back to $3.8k
The QE bubble was great news for US auto sales at the time, as was subprime. But now. interest rates are rising again.
Unsurprisingly, used-car sales are now increasing. They were 3.4m in July versus 3.2m in June and the tariffs mean they have a growing price advantage versus new cars. As the PureCars CEO noted:
“Prices for new cars are on the rise, and as leasing continues to grow in popularity, prices continue to go down in the used car market. Put simply, used cars are often the most realistic purchase for car shoppers.
TRUMP’S AUTO TRADE WAR WON’T SOLVE THE DEMOGRAPHIC AND DEBT ISSUES
President Trump’s trade wars confirm his transactional approach to complex issues. As he told Fox News last month:
“You know, the cars are the big one. We can talk steel, we talk everything. The big thing is cars.”
But tariffs are not a “silver bullet” and cannot solve the two key issues facing the US auto industry:
- The “demographic dividend” of the SuperCycle has been replaced by a “demographic deficit”. Ageing Boomers are not suddenly going to start driving more, whilst affordability issues mean younger Millennials cannot “fill the gap”
- Rising debt levels only gave the economy a “sugar high”, which is now ending as interest rates rise
As with the stimulus programmes, they will instead simply make it more difficult to develop the new policies needed for success in today’s New Normal world.
The blog has now been running for 11 years since the first post was written from Thailand at the end of June 2007. And quite a lot has happened since then:
Sadly, although central banks and commentators have since begun to reference the impact of demographics on the economy, they have not changed their basic belief that the right combination of tax and spending policies can always create growth.
As a result, the world has become a much more complex and confusing place. None of us can be sure what will happen over the next 12 months, given today’s rising geo-political tensions.
In times of short-term uncertainly, it can be useful to take a longer-term view. It is therefore perhaps helpful to look back at Chapter 4 of Boom, Gloom, which gave “Our 10 predictions for how the world would look from 2021:
- “A major shake-out will have occurred in Western consumer markets.
- Consumers will look for value-for-money and sustainable solutions.
- Young and old will focus on ‘needs’ rather than ‘wants’.
- Housing will no longer be seen as an investment.
- Investors will focus on ‘return of capital’ rather than ‘return on capital’.
- The term ‘middle-class’ when used in emerging economies will be recognised as having no relevance to Western income levels.
- Trade patterns and markets will have become more regional.
- Western countries will have increased the retirement age beyond 65 to reduce unsustainable pension liabilities.
- Taxation will have been increased to tackle the public debt issue.
- Social unrest will have become a more regular part of the landscape.
“The transition to the New Normal will be a difficult time. The world will be less comfortable and less assured for many millions of Westerners. The wider population will find itself following the model of the ageing boomers, consuming less and saving more. Rather than expecting their assets to grow magically in value every year, they may find themselves struggling to pay-down debt left over from the credit binge.
“Companies will need to refocus their creativity and resources on real needs. This will require a renewed focus on basic research. Industry and public service, rather than finance, will need to become the destination of choice for talented people, if the challenges posed by the megatrends are to be solved. Politicians with real vision will need to explain to voters that they can no longer expect all their wants to be met via endless ‘fixes’ of increased debt.
“We could instead decide to ignore all of this potential unpleasantness.
“But doing nothing is not a solution. It will mean we miss the opportunity to create a new wave of global growth from the megatrends. And we will instead end up with even more uncomfortable outcomes.”
Most of these forecasts are now well on the way to becoming reality, and the pace of change is accelerating all the time. It may therefore be helpful to include them in your planning processes for the 2019 – 2021 period, to test how your business (and your personal life) might be impacted if they become real.
THANK YOU FOR YOUR SUPPORT OVER THE PAST 11 YEARS
It is a great privilege to write the blog, and to be able to meet many readers at speaking events and conferences around the world. Thank you for all your support.
Consumers are starting to reject the use of single-use plastics, as this Financial Times letter from leading supermarket and business CEOs highlights. Business as usual is no longer an option for plastics producers, as I discussed on Monday.
Sir, The UK’s retailers make a vital contribution to the economy. With revenues of more than £380bn, the sector employs 4.6m people in the UK. Over the past decade Britain’s retailers have in the main focused on recycling in a bid to reduce the environmental impact of the plastic waste they produce. But we have to accept that this isn’t enough — by recycling plastic, we are merely recycling the problem.
Unlike materials such as aluminium and glass, plastic packaging cannot be recycled ad infinitum. Most plastic packaging items can only be recycled twice before becoming unusable. Regardless of how much is invested in Britain’s recycling infrastructure, virtually all plastic packaging will reach landfill or the bottom of the ocean sooner or later. It is therefore essential that retailers and packaging manufacturers work together to turn off the tap of throwaway packaging. Retailers should take advantage of the raft of zero-plastic packaging solutions that provide a real alternative to conventional plastic.
Campaign group A Plastic Planet believes supermarkets can drive a shift away from throwaway packaging by introducing a plastic-free aisle in their stores. We agree. A plastic-free aisle would be good for business. With at least a third of consumers saying that they base their purchasing decisions on the social and environmental impact of the products they buy, a plastic-free aisle would help supermarkets win over this growing band of informed consumers.
We call on the UK’s retailers to support this imaginative initiative, and help us to secure a better future for our children and grandchildren.
Former CEO, Asda
Sir Ian Cheshire
Lord Rose of Monewden
Former CEO, Argos; former Chairman and CEO, Marks and Spencer
Lord MacLaurin of Knebworth
Former Chairman, Tesco
Lord Stone of Blackheath
Former Managing Director, Marks and Spencer
Lord Jones of Birmingham
Former Chief Executive, British Soft Drinks Association
Lord Cameron of Dillington
Former National President, Country Land and Business Association
Baroness Scott of Needham Market
Former Board Member, Lloyds Register; Party President, Liberal Democrats
Former Co-Secretary and Legal Director, Kingfisher
Lord Foster of Bath
Associate, Global Partners Governance
Lord Hodgson of Astley Abbotts
Former Director, Marston’s
Former Attorney General
Former Director, Oxfam
Baroness Miller of Chilthorne Domer
Unicef Board Member
Lord Rees of Ludlow
Baroness Lister of Burtersett
Author and Professor
Managing Director, Weleda UK
China’s ‘One Belt, One Road’ project and the need to reduce pollution have replaced “growth at any price” as key government priorities, as I describe in my latest post for the Financial Times, published on the BeyondBrics blog
Companies and investors are assuming it is “business as usual” in China ahead of the important 19th National Communist Party Congress in October. They look back to the 2012 Congress, and imagine the Party’s leaders are again focused on ensuring economic stability. But in reality, 2012 was the exception not the rule, as it featured two potentially very destabilising events for Communist Party rule:
□ The arrest and subsequent trial of Bo Xilai for corruption. Bo was a very senior Party figure (a so-called Princeling whose father was one of the Party’s “Eight Immortals”), and had been expected to join the Politburo Standing Committee at the 2012 Congress. His wife was separately convicted of murdering British businessman Neil Heywood.
□ The intervention of former president Jiang Zemin in the final preparations for the leadership change. This became essential after President Hu’s top aide was involved in a scandal where he endeavoured to cover up the death of his son — who crashed while driving a Ferrari at high speed through Beijing, accompanied by a woman who also died of her injuries.
No such dramas have occurred this year. And as the chart shows, there has been no need to boost the economy via a repeat of the 50 per cent increase in monthly stimulus lending seen in 2012. Instead, growth in total social financing has actually been slowing.
Companies and investors need instead to focus on the two new areas being promoted by President Xi ahead of his nomination for a second five-year term.
The first is his signature “One Belt, One Road” (OBOR) project. Many have assumed this is simply a mechanism for tackling China’s over-capacity in steel and cement. A measure of its real importance can be seen from the fact that the recent OBOR Summit in Beijing was attended by 20 national leaders and more than 100 countries. It connects 64 countries accounting for 62 per cent of global GDP and has two critical elements:
□ It positions China to resume its geopolitical role as the Middle Kingdom, with the One Belt creating a land link from China to Europe, while the One Road creates a maritime link between the South China Sea, the South Pacific Ocean and the Indian Ocean.
□ Economically, as the map shows, it connects China’s ageing population (its median age will be 43 years by 2030) with the much younger countries along the Belt and Road. Most of them have median ages between 17 and 30 years. The OBOR project enables China to benefit from the demographic dividend potentially available to its neighbours.
OBOR is thus critically important for China as it seeks to avoid becoming old before it becomes rich.
The second new policy is Xi’s decision to move away from the “growth at any price” policies of his predecessors. He knows that reducing pollution, rather than maintaining economic growth, has become key to continued Communist Party rule.
As Alan Clark noted in beyondbrics, “environmental sustainability is rapidly moving up the agenda . . . (as) heavy palls of industrial smog have almost become the norm in some Chinese cities”.
The recent rapid elevation of Beijing’s mayor, Cai Qi, to become party chief for the city is further confirmation of the high priority now being given to tackling air pollution and stabilising house prices.
Taken together, these policies represent a paradigm shift from those put in place 40 years ago by Deng Xiaoping after Mao’s death in 1976. This shift has critically important implications, as it means growth is no longer the main priority of China’s leadership. In turn, this means that stimulus programmes of the type unleashed in 2012, and on a more limited basis by Premier Li last year, are a thing of the past.
Xi’s new priorities have already led to renewed weakness in commodity markets. Their full-scale implementation will probably reconfirm Napoleon’s famous warning that “China is a sleeping giant. Let her sleep, for when she wakes she will move the world.”