Contingency planning is essential in 2020 as “synchronised slowdown” continues

The IMF has now confirmed that the world economy has moved into the synchronised slowdown that I forecast here a year ago. Its analysis also confirms the importance of the issues highlighted then, including “rising trade barriers and increasing geopolitical tensions”, a sharp decline in manufacturing, contraction in the auto industry and structural forces such as the impact of ageing populations.

Capacity Utilisation (CU%) data from the American Chemistry Council has therefore once again proved to be the best leading indicator for the global economy. It has been far more reliable than stock markets, where valuations continue to be massively distorted by central bank stimulus. And unfortunately, the latest data shows no sign of any improvement as the chart confirms, with November’s CU% now back at November 2012’s level at 81.7%.

Of course, it remains very easy to ignore the warning signs. ‘Business as usual’ is always the most popular forecast, as we saw a year ago when the consensus assumed a sustainable economic recovery was finally underway. And it would be no great surprise if, in a year’s time, consensus opinion starts to claim that “nobody could have seen recession coming”.

This is why it seems likely that businesses will now start to divide into Winners and Losers. As the IMF note in their analysis, the current situation is “precarious”, with a number of potential downsides starting to crystallise. On a macro view, these include the growing supply chain risks created by Brexit, where the UK expects to leave the EU at the end of this month.

Anyone with experience of trade negotiations knows that these normally take years rather than months to complete. No Deal is therefore the most likely outcome in a year’s time at the end of the transition period.

This will have a major impact on industries with complex and highly integrated downstream value chains like autos, chemicals and aerospace. Contingency planning is therefore on the critical path for any company that currently relies on product flowing seamlessly and tariff-free across the UK-EU27 border.

Of course, potential Losers will continue to nurse the hope that the UK government might reverse its refusal to accept the 2-year extension offered by the EU. But anyone who followed the recent UK election campaign knows this is an unlikely outcome.

The chemical industry also has its own specific challenges to face, given the growing impact of US shale gas-based expansions in the polyethylene area. This is no great surprise, as I have been warning about the likely consequences of these supply-led expansions since they were first announced in 2014 . But unfortunately, the combination of stock market euphoria over the shale gas revolution and the Federal Reserve’s easy money policy meant that the core assumptions were never properly challenged.

Euphoria remained the rule even after the oil price collapse at the end of 2014 disproved the assumption that prices would always be above $100/bbl. And it continued despite President Trump’s election. As a self-confessed “tariff man”, his policies were always likely to upset the idea that plants could be sited half-way across the world from their markets.

Warning signs were also obvious around the assumption that China’s growth would remain at double-digit rates, creating an ongoing need for major imports. And more recently, concerns over climate change and plastic waste issues have created further question marks over the outlook for single-use plastic demand.

Incumbents are often slow to understand the likely impact of potentially disruptive developments on their businesses. Business discussions around the boardroom and water cooler can often take place in a parallel universe to those that happen outside the office with friends and family.

The upstream oil industry is currently providing a classic example of this phenomenon as it promotes the idea that despite mounting concerns over the role of fossil fuels in climate change, chemicals can somehow replace lost oil demand into transport. Yet as former Saudi Oil Minister Yamani warned back in 2000, “the Stone Age didn’t end for lack of stones, and the Oil Age will end long before the world runs out of oil”.

Unfortunately, therefore, it seems likely that 2020 will see today’s synchronised slowdown continuing to challenge consensus optimism. Contingency planning around recession risks should therefore be top of the agenda, particularly for companies with high debt levels.

But at the same time, better placed companies have a once in a generation opportunity to take advantage of the paradigm shifts now underway, as adoption rates accelerate up the typical S-curve. These Winners are likely to discover that their best days still lie ahead of them, given the range and scale of the new opportunities that are emerging.

Please click here to download my full 2019 Outlook (no registration necessary).

Boris Johnson will have to disappoint someone in 2020 as the UK finally leaves the EU

Finally, after three and a half years, the UK has reached “the end of the beginning” with Brexit, in Winston Churchill’s famous phrase.

Since the referendum, its leaders have consistently refused to confront the real choices that have to be made over what type of Brexit it wants to have:

  • In June 2016, then premier David Cameron walked away from the issue by resigning immediately after the referendum
  • His successor, Theresa May, followed this by setting out her ’red lines’, as shown in the chart. But she never said what she did want, effectively leaving No Deal as the default option
  • On the Labour side, Jeremy Corbyn indulged in the same game-playing, even refusing to say which way he would vote in a new referendum

As a result, the myth grew up that there was a wonderful option called ‘WTO terms’, which would allow the UK to do exactly as it liked on standards, regulations, freedom of movement etc. Yet it would still have complete access to the EU27 market without any need for quotas or Customs barriers.

Unfortunately for all those who have indulged in such wishful thinking, 2020 is likely to provide an abrupt and painful wake-up call.  Once the UK has left the EU in January, Johnson will have to make major choices, and on a very tight timescale.

The government’s key mistake all along was to table its Article 50 notification to leave without having first decided what it wanted from the new relationship with the EU27. And by dismissing the role of “experts” and key Brussels negotiators such as Sir Ivan Rogers, it also never properly understood what might be possible from an EU27 perspective.

Now the need for choices is going to become apparent, as the Transition Agreement only runs to December 2020, and any request for an extension has to be agreed by June.  Johnson has said he will not ask for an extension, and so this narrows the choices:

  • France has said the UK can leave with a ”unique” trade deal encompassing most of the current arrangements, if the UK agrees to maintain today’s standards and regulations into the future. In effect, this would be a Norway-type deal, where the UK becomes a rule-taker, without any say in how the rules are made
  • The alternative is to leave with No Deal, as anyone with experience of trade deals knows that it is simply impossible to square all the necessary circles involved in reaching a new deal in less than 5 – 7 years. The reason is simply that trade deals create winners and losers, and the losers always complain, very loudly

One likely example of a deal-breaker is fisheries policy.

Fishing accounts for just 0.1% of the UK economy, and employs only 24k people out of a total workforce of 33m. And contrary to popular belief, not only have foreign boats been fishing in UK waters for centuries, but 70% of the fish eaten in the UK is imported (cod etc) – with 80% of fish caught by UK fishermen  exported (herring, shellfish etc).

But it was core to the Leave campaign, and Johnson is likely to find it hard to ignore – even if that means fishermen end up facing quotas, tariffs, Customs barriers and a collapse of conservation policies.

Johnson is happy to break promises, as he did over N Ireland when agreeing to the EU27’s terms for the Withdrawal Agreement. But it would be rather soon after the election to break his promise over fishing or, indeed, his promise not to extend the Transition period.

As a result, Theresa May’s legacy will finally be fulfilled, as No Deal remains the default option.  And at that point, the UK will learn very painfully that you really cannot “have your cake and eat it”, despite Johnson’s claims to the contrary.

What’s next for Brexit and chemicals?

The UK is about to go to the polls again to try and decide the Brexit issue.  Chemicals will be one of the industries most affected by the decision, as it depends on cross-border supply chains.  As the UK Chemical Industries Association has warned:

“The chemical industry in the UK and in Europe needs a relationship with the European Union that delivers: frictionless, free trade; regulatory consistency and alignment; and access to skilled people.”

Next Tuesday at 11.00 GMT, I will be presenting at the second live ICIS webinar on Brexit’s potential impact on the industry, along with ICIS deputy news editor, Tom Brown and ICIS Chemical Business Deputy Editor, Will Beacham.

The webinar will cover the following:
• Update on the political situation, possible scenarios, how to prepare for Brexit
• Trade deal scenarios and tariffs
• Impact on UK and Europe petrochemicals

Please register here to join this free webinar.

UK election offers voters no middle ground in December

Pity the poor UK voters as they prepare to vote in probably the most critical election of their lives.

As they battle the wind and rain to vote in the first December election for 100 years, they already know there are only 3 likely outcomes:

  • Tory majority, Brexit by end-January, EU trade deal uncertain
  • Labour majority, Brexit postponed, hard socialist agenda
  • Another minority government, outcome uncertain

The first option is less likely than the polls suggest, for the simple reason that Johnson will lose probably 40+ seats in Remain areas – to the LibDems in the South/London, and to the SNP in Scotland. To win, he therefore has to persuade large numbers of traditionally Labour Leave voters in the North/Midlands to vote Tory, for the first time in their family’s history.

President Trump’s proposed solution – an alliance with the Brexit Party – would avoid splitting the Leave vote and might gain the Brexit Party some Labour seats. But Trump’s personal unpopularity with most UK voters means his intervention on Friday is unlikely to help. Britons, like Americans, don’t like foreigners interfering in their domestic elections.

And then, of course, there are the dark arts of social media. Johnson’s chief of staff, Dominic Cummings, pioneered the UK’s use of these when running the Leave campaign.  Who knows what lies and half-truths will be circulated this time, and what impact they might have?

The second option depends critically on whether Labour can neutralise the Brexit issue by saying they will ‘trust the people’ with a second vote in a summer referendum – and not go into detail about the question that would be asked.

If they can, then their leader, Jeremy Corbyn, has a perfect opening for the old-fashioned campaigning at which he excels. He can simply attack the Tory record of the past 10 years and focus on issues such as the economy, climate change, the NHS and education, which are natural vote winners for Labour.

In normal circumstances, Labour would then be odds-on favourites to win.  But their leader, Jeremy Corbyn, has the lowest favourability ratings of any recent Opposition leader. He seen as an hard-line socialist and as weak on tackling anti-semitism in the party. As a result, the party struggles in the polls.

The 3rd option of another minority government includes a wide range of outcomes.  It could put the UK back in the chaos of the past 3 years, with nobody able to agree anything. Or, it could mean a second referendum on both Brexit and Scottish independence.

The key will be the level of LibDem support. Can they get to 75+ seats, and become ‘kingmakers’ along with the SNP and the other smaller parties?

Both Tories and Labour are vulnerable to them in Remain seats, due to their clear anti-Brexit policy.

Their focus on the characters of the Tory and Labour leaders is also a likely vote-winner.  But their problem is the UK’s ‘first-past-the-post’ electoral system, which usually means they win a lot of votes, but relatively few seats.

THE MAIN UK PARTIES HAVE ABANDONED THE MIDDLE GROUND
The problem for most voters is that there is no middle ground for them to choose, as in the past:

  • The Tory Party has swung to the right and is promoting English nationalism to avoid losing votes to the Brexit Party
  • The Labour Party has swung to the left and wants to overturn capitalism and adopt 1970s-style socialism
  • The LibDems and SNP agree on Remain, but the SNP also wants to break-up the UK

Johnson’s gamble depends on him winning a large number of seats from Labour to compensate for his losses in Remain areas.

Despite today’s poll ratings, Labour could therefore well take power as a minority government if they campaign effectively. The reason is that it is easier for them to do a deal with the other parties – by offering a referendum with a Remain option to the LibDems, and one on Scottish independence to the SNP.

Pity, therefore, the traditional middle-of-the-road Tory, Labour and LibDem voters,. They need to choose their ‘least worst option’ if they want to affect the result – Brexit, socialism or possible UK break-up. This would not be a great choice for a G7 country at the best of times. It would be even worse today, as an increasingly protectionist world slides into recession,

 

No Deal Brexit still a likely option if opposition parties fail to support a new referendum

Canada’s normally pro-UK ‘Globe and Mail’ summed up the prevailing external view of Brexit last week:

“We begin this editorial with an apology to you, our faithful readers. In March, we described the Brexit situation, then careening through its third year and nowhere close to resolution, as an “omnishambles.

“An omnishambles is a state of utter chaos, total disorder and perfect mismanagement – which brings us to our apology. If you’ve been paying any attention to British Prime Minister Boris Johnson, you know that, in declaring United Kingdom politics to have reached peak shambolic six months ago, we spoke too soon. Oh, did we ever.”

Within the UK, most people are totally confused by the mixed messaging surrounding Brexit.  Was it effectively postponed again when Parliament passed a law meant to stop No Deal? Or is it all still going to go ahead – deal or no deal – on 31 October, as the prime minister insists. Nobody knows.

There has also been no debate about what kind of policies should be pursued after Brexit. Instead, the media has often focused on the influence of  Johnson’s chief of staff, Dominic Cummings (pictured above, in casual dress).

Cummings led the Leave campaign under Johnson, and continues to carry out Johnson’s strategy today.  And whether by accident or design, his apparent fondness for tee-shirts also seems to be proving a useful tactic for diverting media attention away from discussion of potential food shortages.


Behind all the spin, Johnson’s strategy is simply responding to the opinion polls above.  He knows he has to win back Brexit Party voters if he wants to win a General Election.  Understandably, therefore,  he is going hard for the exit, declaring that he’d “rather die in a ditch” than leave after 31 October.

“Luckily” for him, he is up against Jeremy Corbyn – my local MP – who has completely failed to present a coherent policy on Brexit.  And Johnson has exploited this position by focusing on the Opposition’s continued failure to answer the critical question – “what would any extension be for?

It seems the Liberal Democrats will finally come off the fence under their new leader, Jo Swinson, and decide to campaign to remain in the EU. But we will have to wait to see if Labour’s Conference can force Corbyn to abandon his long-standing opposition to the EU.

If not, it is quite possible that the EU27 could refuse the extension request at next month’s Summit, if it doesn’t seem likely to lead to a second referendum or a new government.

Germany’s Chancellor Merkel has already set out her belief that Johnson wants to convert the UK to a form of Singapore-on-Thames. with a low tax, light-touch regulatory environment in direct opposition to the rules of the EU Single Market.

3 alternative and quite different scenarios therefore exist for the Brexit endgame:

  • No Deal. Johnson finds a way round Parliament and the No Deal Act, and leaves without a deal on 31 October. He then campaigns on the theme of ‘The People v Parliament’ and blames Parliament for blocking his hopes of getting a deal
  • 2nd referendum. The opposition parties threaten to install an interim government that would replace Johnson, and ask the Summit for an extension to allow an election and 2nd referendum.
  • ‘Plan B’.  Johnson understands the value of contingency planning.  Given his key policy is to leave on 31 October, he is already exploring the opportunity for a deal on the basis of accepting the EU’s proposed N Ireland-only backstop option.  He could then still campaign having (a) achieved a deal and (b) left as promised.

At the moment, Johnson clearly sees No Deal as his best option, as it means he doesn’t have to compromise.  So it is no surprise that the Foreign Secretary has warned they will “test (the No Deal Act) to the limit”, in order to leave on 31 October without a deal.

The compromise of a Plan B would clearly lose him DUP and Brexit Party votes.  But it might offer Johnson his best chance of staying in office, if the Opposition did agree to push for a new referendum. It would be humiliating, to say the least, if his term in office proved the shortest in history.

The next few weeks may therefore compel the ‘Globe and Mail’ to issue yet another apology to its readers.

 

UK, EU27 and EEA businesses need to start planning for a No Deal Brexit on 31 October

New UK premier, Boris Johnson, said last week that the UK must leave the EU by 31 October, “do or die, come what may”.

This means UK, EU27 and EEA companies now have less than 100 days to prepare for a UK No Deal Brexit. That’s less than 70 working days – and even less if you plan to take a holiday over the summer.

If the UK leaves without a deal, it will also leave the Single Market and the Customs Union. So everything will change overnight – 400 million Customs Declarations will likely be needed each year, plus compliance with Rules of Origin and thousands of other major/minor regulatory changes.

Of course, it is still just possible that the UK might change its mind. Or that the new UK government might persuade the EU27 to give up the so-called “Irish backstop”. This aims to avoid the need for border controls between Northern Ireland and the Republic of Ireland.

But neither outcome looks very likely today.

THE AUTO INDUSTRY IS ALREADY WARNING OF THE RISKS AHEAD 
Businesses therefore now need to prepare for a No Deal Brexit on 31 October.

What does this mean?  It means that companies have to assume there will be no transition period. Instead, the UK will operate under WTO rules.   The UK car industry has highlighted the risks this creates in a letter to the new premier:

“We are highly integrated with Europe, and a no-deal Brexit would result in huge tariff costs and disruption that would threaten production, as well as further undermining international investors’ confidence in the UK. We need a deal with the EU that secures frictionless and tariff free trade.

“A no-deal Brexit presents an existential threat to our industry.  Above all, we must ensure the sector continues to enjoy — without interruption — preferential trade with critical markets around the world, including the EU”.

The chart above highlights the potential impact on the Nissan car factory in NE England.

THE NEW UK GOVERNMENT IS NOW PREPARING A MAJOR COMMUNICATIONS CAMPAIGN

Cabinet Office minister, Michael Gove, has been put in charge of No Deal preparations. And the aim is to quickly launch a major communications campaign to help the public and businesses get ready for leaving the EU without an agreement. As Boris Johnson said last week:

“What we will do, is we will encourage people in a very positive way. From the get-go, we start saying, ‘Look, what do you need, what help do you need, what reassurances do you need?’”

This will add to the information already available by clicking on the Gov.uk website:

READY FOR BREXIT PROVIDES PLANNING AND AUDIT TOOLS, PLUS DETAILED LINKS  

A No Deal Brexit will impact companies and supply chains.  This is why I co-founded Ready for Brexit a year ago, with a number of highly-experienced industry colleagues. It is subscription-based, and features detailed Brexit checklists, a No Deal Brexit planning tool and a BrexSure audit tool to check your suppliers and customers are also fully prepared.

It focuses on the key areas for business, as our Brexit Directory above shows:

  • Customs & Tariffs: Export/Import Registration, Labelling, Testing, VAT
  • Finance: Payment Terms, Tax & VAT, Transfer Pricing
  • Legal: Contracts, Free Trade Agreements, Intellectual Property
  • Services & Employment: Banking, Insurance, Investment, Property
  • Supply Chain: Documentation, Regulation, Transport

We can all hope that Johnson’s renegotiation with the EU27 is successful. But hope is not a strategy.

With the new government committed to the 31 October deadline, businesses really are taking an enormous risk if they don’t focus all their energies on planning for ‘No Deal’.