I well remember the questions a year ago, after I published my annual Budget Outlook, ‘Budgeting for the Great Unknown in 2018 – 2020‘. Many readers found it difficult to believe that global interest rates could rise significantly, or that China’s economy would slow and that protectionism would rise under the influence of Populist politicians.
MY ANNUAL BUDGET OUTLOOK WILL BE PUBLISHED NEXT WEEK
Next week, I will publish my annual Budget Outlook, covering the 2019-2021 period. The aim, as always, will be to challenge conventional wisdom when this seems to be heading in the wrong direction.
Before publishing the new Outlook each year, I always like to review my previous forecast. Past performance may not be a perfect guide to the future, but it is the best we have:
The 2007 Outlook ‘Budgeting for a Downturn‘, and 2008′s ‘Budgeting for Survival’ meant I was one of the few to forecast the 2008 Crisis. 2009′s ‘Budgeting for a New Normal’ was then more positive than the consensus, suggesting “2010 should be a better year, as demand grows in line with a recovery in global GDP“. Please click here if you would like to download a free copy of all the Budget Outlooks.
THE 2017 OUTLOOK WARNED OF 4 KEY RISKS
My argument last year was essentially that confidence had given way to complacency, and in some cases to arrogance, when it came to planning for the future. “What could possibly go wrong?” seemed to be the prevailing mantra. I therefore suggested that, on the contrary, we were moving into a Great Unknown and highlighted 4 key risks:
- Rising interest rates would start to spark a debt crisis
- China would slow as President Xi moved to tackle the lending bubble
- Protectionism was on the rise around the world
- Populist appeal was increasing as people lost faith in the elites
A year later, these are now well on the way to becoming consensus views.
- Debt crises have erupted around the world in G20 countries such as Turkey and Argentina, and are “bubbling under” in a large number of other major economies such as China, Italy, Japan, UK and USA. Nobody knows how all the debt created over the past 10 years can be repaid. But the IMF reported earlier this year that total world debt has now reached $164tn – more than twice the size of global GDP
- China’s economy in Q3 saw its slowest level of GDP growth since Q1 2009 with shadow bank lending down by $557bn in the year to September versus 2017. Within China, the property bubble has begun to burst, with new home loans in Shanghai down 77% in H1. And this was before the trade war has really begun, so further slowdown seems inevitable
- Protectionism is on the rise in countries such as the USA, where it would would have seemed impossible only a few years ago. Nobody even mentions the Doha trade round any more, and President Trump’s trade deal with Canada and Mexico specifically targets so-called ‘non-market economies’ such as China, with the threat of losing access to US markets if they do deals with China
- Brexit is worth a separate heading, as it marks the area where consensus thinking has reversed most dramatically over the past year, just as I had forecast in the Outlook:
“At the moment, most companies and investors seem to be ignoring these developments, assuming that in the end, sense will prevail. But what if they are wrong? It seems highly likely, for example, that the UK will end up with a “hard Brexit” in March 2019 with no EU trade deal and no transition period to enable businesses to adjust.
“Today’s Populist politicians don’t seem to care about these risks. For them, the allure of arguing for “no deal”, if they can’t get exactly what they want, is very powerful. So it would seem sensible for executives to spend time understanding exactly how their business might be impacted if today’s global supply chains came to an end.”
- Populism is starting to dominate the agenda in an increasing number of countries. A year ago, many assumed that “wiser heads” would restrain President Trump’s Populist agenda, but instead he has surrounded himself with like-minded advisers; Italy now has a Populist government; Germany’s Alternativ für Deutschland made major gains in last year’s election, and in Bavaria last week.
The last 10 years have proved that stimulus programmes cannot substitute for a lack of babies. They generate debt mountains instead of sustainable demand, and so make the problems worse, not better. As a result, voters start to listen to Populists, who offer seemingly simple solutions to the problems which have been ignored by the elites.
Next week, I will look at what may happen in the 2019 – 2021 period, as we enter the endgame for the policy failures of the past decade.
The post “What could possibly go wrong?” appeared first on Chemicals & The Economy.
“BASF, the world’s biggest chemical maker by sales, has slashed its revenue and earnings targets for 2015, following a further weakening of the European economy and a slowdown in China.”
Saturday’s Financial Times headline said it all. BASF’s statement adds to the growing evidence of a major slowdown taking place in the global economy, and highlights how recovery seems as far away as ever.
Latest data from the American Chemistry Council also confirms that hopes for a recovery are fading. It showed no increase in Capacity Utilisation in the global chemical industry. In fact, as the chart shows, the rate fell 0.1% to 83.2% in September and remains well below the historical average of 92%. As the ACC note:
“Gains in production were centered in North America (aided by the shale gas revolution) with nominal gains in Central & Eastern Europe and Asia-Pacific. Over the same period, chemical industry production contracted elsewhere.”
Next Monday, I will publish my annual Budget Outlook. And so as usual, today’s post looks back at last year’s Budget Outlook. Past performance may not be a perfect guide to the future, but it is the best we have. All previous Budget Outlooks are also now available in a new Research Note – please click here to download a free copy.
A quick summary of the Budget Outlooks since they began in 2007 is as follows:
•The 2007 Outlook ‘Budgeting for a Downturn‘, and the 2008 ‘Budgeting for Survival’, forewarned readers of the coming Crisis, when most expected the good times to continue
• 2009′s ‘Budgeting for a New Normal’ was then more positive than the consensus, suggesting “2010 should be a better year for the chemical industry, as demand grows in line with a recovery in global GDP“
• The 2010 Outlook was titled ‘Budgeting for Uncertainty’. This introduced the concept of Scenario planning, to help deal with “today’s increasingly uncertain New Normal environment.”
• 2011 was titled ‘Budgeting for Austerity’. It anticipated weak growth across Europe as a result of the austerity measures being introduced, and disappointing global growth, whilst arguing that major new opportunities were opening up as a result of changing demographic trends.
2012 was titled ‘Budgeting for an L-shaped recovery’, arguing that the idea of a recovery back to SuperCycle levels of growth would prove wishful thinking. This was again a contrarian view, as policymakers at the time were insistent that full recovery was now inevitable, if slightly delayed.
Reading back through last year’s 2013 forecast, ‘Budgeting for a VUCA world’, it is also hard to find much that one would wish to change today. Most of the key issues that it highlighted have now become more widely accepted, although they were controversial at the time:
- Its argument about the negative impact of policymaker stimulus and the risks of a “boom-bust cycle” in emerging economies are now the subject of major political debate
- Oil and commodity prices have, of course, also tumbled as forecast, whilst the impact of China’s new economic policies is clearly now a major concern
- Even those issues which have been less prominent are starting to attract attention again
- Few now believe the Eurozone crisis has been solved
- US political dysfunction seems likely to move centre stage again after next week’s US mid-term elections
So all in all, companies would have had few surprises had they followed this Outlook. And “no surprises” is always the key for a successful Budget. It creates a positive dialogue with investors and allows employees to execute agreed plans without sudden panics setting in.
I hope readers found the 2013 Budget Outlook helpful in making their own plans. Encouraged by this latest success, the Budget Outlook for 2015-17 will be published next week.
WEEKLY MARKET ROUND-UP
The weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
PTA China, down 24%. ”End users were citing difficulties in passing down such additional costs to their customers, on the back of relatively weak global macroeconomic conditions”
Naphtha Europe, down 21%. “Demand from outlets such as the Asian export market remains weak, and consequently naphtha supply in Europe remains long.”
Brent crude oil, down 18%
Benzene Europe, down 11%. “Traders pointed to shutdowns across Europe keeping supply tight.”
S&P 500 stock market index, up 1%
HDPE US export, up 4%. “Prices remained unchanged – or unworkable, as one trader described them. Other sources agreed, describing a big difference between US prices and lower international levels.”
New Year is a traditional moment for price increases. And last week didn’t disappoint, with Brent crude oil jumping $3/bbl. Whilst financial markets soared globally on hopes that the US ‘fiscal cliff’ deal might be a sign that policymakers will finally provide leadership to tackle the continuing economic crisis. The only problem is that we have seen similar New Year optimism before:
• 2012 saw Brent up $6/bbl and financial markets strong
• Brent also rose $2/bbl in 2011; $8/bbl in 2010; and $4/bbl even in 2009
• The US S&P 500 Index also rose at the same time each year
Still, good news is good news. And as the chart shows, the blog’s latest IeC Boom/Gloom Index (blue column) confirmed the general improvement in sentiment. It rose back into Boom territory, close to August levels. Whilst the Austerity reading (red line) slipped back to September levels.
The key, of course, is whether this optimism turns into sustained improvement in the economic fundamentals. Here, the signs are not so immediately encouraging. As The Guardian newspaper noted, most of us “can’t get a grip on the trillions involved in the fiscal cliff deal“.
It therefore removed 8 zeroes from each of the relevant numbers in the US budget talks, and instead presented them in the form of a family budget:
Family income (eg US tax revenue): $21700
Family spending (Federal Budget): $38200
New credit card debt (New debt): $16500
Existing credit card debt (National Debt): $142710
Budget cuts so far (fiscal cliff deal): $38.50c
Thus the ‘fiscal cliff’ deal will lead to $38,500,000,000 of budget savings, versus the currently planned increase in debt of $1,650,000,000,000. This may not be quite enough to sustain optimism for very long, unless more meaningful changes start to be discussed.
The chart shows benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, and latest ICIS pricing comments below:
HDPE USA export, down 20%. “Producers are avoiding traders and brokers and are moving material directly overseas themselves”
PTA China, down 11%. “Polyester industry in China has so far been healthy, driven by firmer upstream prices and upbeat China economy”
Naphtha Europe, down 15%. “Petchem demand is poor, with rival feedstock propane trading at a significant discount to naphtha”
Brent crude oil, down 11%
Benzene NWE, up 14%. “Market still felt a little like it was in holiday mode”
S&P 500 stock market index, up 8%
As companies finalise Budgets for 2013-15, many will be thinking long and hard about the implications of the IMF’s new economic forecast:
“The recovery continues, but it has weakened. In advanced countries, growth is now too low to make a substantial dent in unemployment. And in major emerging market economies, growth that had been strong earlier has also decreased.”
This is a sad reflection on the failure of the policies followed since March 2009.
The reason for the disappointment is simple. As any business executive knows, demographics drive demand. But central banks and governments, with the exception of the Bank of Japan, continue to ignore this vital fact.
This is why the blog has co-authored ‘Boom, Gloom and the New Normal’. Its aim is two-fold:
• To provide a robust and well-researched alternative view of likely future growth prospects
• To support Boards and business managers in charting a new course to success and profitability
The key issue is that 297m people in the West will be in the New Old 55+ generation by 2015. They will be 31% of the population. Thus growth will inevitably be very much slower than in the 1982-2007 Supercycle years.
The reason is simple:
• When people are young, they need to buy new things
• And the Western BabyBoomers had lots of money to spend
• But now the kids have left home, and they don’t need many new things
• Instead, they mainly buy replacement products, and only when these wear out
Equally, the economies of the developing world now have to refocus on domestic demand, and away from exports to the West. Their populations are very poor by comparison with the West, so they cannot replace the lost spending there. These New Poor have money to spend for the first time in their lives, but their purchases also have to be both essential and affordable.
Thus the blog suggests that companies should budget for a continued L-shaped recovery. It first suggested this back in December 2008. Sadly, events since then have only confirmed its analysis:
• Originally it was widely assumed we would see a quick V-shaped recovery
• Then a U-shape was expected, as recovery seemed delayed
• Next a W-shape was forecast, as new stimulus would finally lead to recovery
• But in reality, there has not been a sustained recovery
• Instead, we have seen volatile markets, as stimulus ebbs and flows
Clearly central banks and governments still believe they will eventually return the world to the SuperCycle. But as the great scientist Einstein wisely remarked, a good definition of lunacy is to repeat the same action, and expect different results.
Far-sighted companies will therefore ignore the temptation to believe that the next stimulus programme will be different. Instead, they will focus on what they can do to insulate their business from the turbulence around them, by focusing on the key issues that they can control.
The good news is that almost nobody is producing goods and services for the New Old 55+ generation in the West. And only a few, like Nissan, are starting to manufacture affordable goods for the billions in the New Poor generation in emerging economies. Therefore competitive pressures in these two vast and growing sectors are very low.
These are the two great business opportunities of our lifetimes. The companies that now use the 2013-15 period to access these, will be building the foundations for decades of future success.
The blog today celebrates its fifth birthday. Its 1400 posts since the June 2007 launch have covered a wide range of subjects. And one thing is certainly true. There has never been a shortage of topics to cover.
Readership has also continued to grow very steadily. As the map shows, the blog is now read in 145 countries, and 6433 cities. And one of its great pleasures is meeting readers all over the world, when it travels to meetings and is invited to speak at conferences.
Reader loyalty is also incredibly strong. 54% now visit at least once a week. And 42% visit at least twice a week. This loyalty has supported a wide range of related initiatives:
• Its Budget Outlooks at the start of the year remain extremely popular
• Chemicals and the Economy webinars are organised every 6 months by the American Chemical Society. The next is on 12 July
• ICIS Chemical Business regularly features its analysis of key topics
• Workshops are also held in all major regions for readers and companies
Over the past year, of course, the blog has also been publishing its new eBook, ‘Boom, Gloom and the New Normal’ with fellow-blogger John Richardson:
• This describes the impact of changing demographics on the global economy and chemical demand patterns. And it presents clear strategies for success in the transition to the New Normal that is now underway
• 15,000 readers have already downloaded the book. Whilst several major companies are using its analysis to develop winning strategies for their future business
The blog would like to thank all its readers for your continued support.
Companies are now starting the Budget process for 2012-14.
As always, the blog will present its own view next month. It will also review last year’s Budget Outlook, presciently titled ‘Budgeting for Uncertainty’.
In the meantime, companies might like to use its recent ‘The world in 2021′ as a way of challenging their own thinking about the likely future.
Conventional wisdom is still convinced that any day soon, the world will somehow return to ‘normal’. Demand will then resume its steady upward growth, and today’s economic and political uncertainties will magically disappear.
Of course, conventional wisdom may be right.
But its record at major turning points is shockingly bad. It may not, therefore, be very useful in current circumstances.
Boards and business teams may therefore find it valuable to debate the blog’s alternative view, to help develop their own shared view of the outlook.
You can download a copy of the 2 page summary, ‘The world in 2021’ by clicking here. The full chapter can be downloaded by clicking here.
The blog hopes you will find its analysis helpful in these uncertain times.