The UK economy appears to be recovering well from the financial crisis. But appearances can be deceptive.
Certainly employment has risen for both men and women since 2009, and the jobless rate has fallen. But new data yesterday from the Office for National Statistics highlights how, despite these achievements, total incomes have been falling in real terms since 2009, as the chart shows:
- Male employment has risen by 900k (blue shading) and female employment by 700k (red)
- Male and female employment have also hit all-time highs of 16.8m and 14.1m respectively
- But total male and female earnings have continued to decline in real terms as £2015 (black line)
- They peaked in 2009 at £1.1tn ($1.67tn), but have since fallen 9% to £1tn today
The reason, of course, is the factor that governments prefer to ignore, namely demographics. The UK is an ageing society, and earnings peak by the age of 50 as the second chart highlights (again based on ONS data):
- There were 5.8m people working in the 30-39 age group, with median earnings of £490/week ($750/week)
- 6.4m were working in the 40 – 49 cohort, with median earnings of £493/week
- But increasing life expectancy meant there were 5.4m working in the 50-59 cohort at £458/week, and 1.9m working in the 60+ cohort at £339/week
- Whilst falling fertility rates meant there were only 4.4m working in the 22-20 cohort for £383/week, and just 1.2m in the 18-21 cohort for £201/week
Of course, governments prefer to focus on achievements when they talk about employment. And with major spending cuts due to be announced next week, no doubt ONS felt it was better not to highlight the issue in their summary report. As far as I can tell from a Google search, none of the major media has mentioned this key fact in their reports.
However, it is clearly critical for both companies and investors. Consumption is around 2/3rds of the UK economy, and it is the 5th largest economy in the world. The data clearly highlights the fact that, like other major economies, the UK faces a future where there will be a declining number of people in the peak earning and spending Wealth Creator 25 – 50 age group, and a rising number of people in the lower-income and spending 50+ age group.
Companies can’t expect to sell products and services to people who can’t afford them. There is therefore an increasingly urgent need for them to develop new business models focused on providing low-cost essentials to the growth area of the over-50s.
Demographics is destiny, after all,
The chemical industry continues to be the best leading indicator we have for the global economy. Whilst stock markets were continuing to move higher during H1, its depressed level of capacity utilisation was signalling that the economy was far more fragile than generally realised.
Company results for Q2 reflect this concern. Of course some, tied to specific market sectors or geographies, produced relatively good results. Others, however, were already cutting back in anticipation of harder times ahead.
Yesterday’s relatively weak US Q2 GDP report confirms this mixed picture. Q1 GDP was revised up to 0.6%, but Q2 disappointed at only 2.3%, meaning that H1 growth averaged just 1.5%. And GDP growth between 2012 – 2014 was revised down to an average annual rate of just 2%.
In turn, this means the recovery since 2009 has been the weakest since World War 2, with growth averaging 2.2%.
As we move into Budget season, companies may be tempted to assume that “all will eventually come right”. But this, I fear, would be a triumph of hope over experience. The fault-lines created by central bank policies are opening wider and wider:
- Clearly China’s economy is in a lot worse shape than many people had wanted to believe
- The Eurozone debt crisis over Greece is on hold for the holiday period, but not solved
- Oil prices look set to continue weakening as demand growth slows and Iran re-enters the market
- And, of course, the US Federal Reserve probably has to start raising interest rates in September (before the 2016 Presidential primaries begin), risking further volatility in exchange and interest rates
Looking back to my Budget Outlook for the 2015-2017 period, its 3 Scenarios still seem robust – as does its Base Case of a demand-constrained world. Similarly its forecast of deflation has come true, with prices for oil, commodity and the major petrochemicals all well down on a year ago.
More details of my usual survey of Q2 results are below.
Air Products. “Income rose on lower sales on higher pricing and volumes”
Air Liquide. ” positive currency effect was partly offset by the negative impact of energy prices”
Akzo Nobel. “Global economy remains challenging and shows a very mixed picture with different dynamics per region and customer segments”
Arkema. “Positive currency effects and earnings contributions from newly-acquired subsidiary Bostik”
Ashland. “Unfavourable exchange rates and lower demand from North American energy producers”
BASF. ““For the full year 2015, we now expect somewhat weaker growth for the global economy as well as global industrial and chemical production than was foreseen six months ago”
BP. “Stronger operational performance, improved margins and the benefits of our simplification and efficiency programmes”
Bayer. “Benefited from lower raw material prices due to the oil crude price decrease and improved demand, together with a positive currency exchange”
CP Chem. “Improved olefins and polyolefins cash chain margins as ethylene costs decreased on the crude oil price fall”
Celanese. “Growing uncertainty in the economic outlook of China”
Chemtura. “Reduced customer demand for certain products and a stronger US$ contributed to the fall in net income”
Clariant. “Expects the challenging environment characterized by an increased volatility in commodity prices and currencies, to continue”
Croda. ” Conditions remain uncertain in Europe”
Dow. ““This is not yet a [peak of the] cycle discussion but it’s starting to mimic one with outages. That’s what we saw in 1995… where supply outages created a mini cycle on the up”
Dow Corning. “Significant growth in its most profitable silicones segment product lines”
DuPont. “industry challenges in the agricultural sector and persistent currency headwinds”
Eastman. “Increase in sales, as well as relatively flat cost of sales”
ExxonMobil. “Performance underscored the resilience of the integrated business model”
Honeywell. “Sales were down 1% year over year because of delays in customer projects and lower catalyst shipments”
Huntsman. “Currency headwinds from a stronger dollar and the extended maintenance outage”
INEOS. “Strong, feedstock-advantaged North American markets and a weaker euro; markets in Asia have generally remained subdued”
Lanxess. “Making good progress with our realignment program”
LyondellBasell. “A spate of production outages in the industry added to tailwinds from abundant oil and natural gas supplies”
Methanex. “Drop in its revenue and average realized price”
Mexichem. “Difficult conditions on volumes and pricing in certain markets”
Olin. “Benefited from insurance recoveries for property damage and business interruption”
OxyChem. “Improved margins across most product lines on the back of lower ethylene and natural gas costs”
PKN Orlen. “Better PX/PTA and polyolefin sales volumes after production limitations and improved market demand”
PolyOne. “Euro remains very weak against the dollar and demand appears to be slowing in Asia”
PetroRabigh. “Lower margin on petrochemicals due to price decline”
Praxair. “Slowdowns in China and Brazil and weak metals, energy and manufacturing sectors”
Reliance. “Petrochemicals business recorded a strong quarterly performance supported by high operating rates and margin strength in the ethylene chain”
SABIC. “Lower average sales prices despite the reduction in cost of sales”
Sahara. “Decline in demand and product prices”
Sherwin-Williams. “Improved operating results in the company’s paint stores and consumer groups”
Shell. “Supported by improved intermediates market conditions which more than offset lower base chemicals industry conditions”
Siam Cement. “Improved margins and inventory gains”
Tasnee. “Lower product prices and higher expenses”
Technip. “Launched a major restructuring plan across the Group to address the challenging market outlook we anticipate”
Tosoh. “Increased sales volume and decreased feedstock prices”
TOTAL. “Petrochemical margins were also higher, notably due to limited production capacity as a result of numerous shut downs in the industry”
Unipetrol. “Much lower crude oil prices combined with solid market demand”
Univar. “Significantly lower chemical demand in upstream oil and gas markets in the US and other regions”
Versalis. “Stronger margins, shortages of some products on the back of industry outages, and the restart of its Porto Marghera plant”
Yansab. “Lower production and sales volume from turnaround activities … and lower average sales prices”
Increasing volatility in major Western financial markets suggests they are struggling to maintain their momentum.
It is certainly hard to be very optimistic about the outlook for the major Western stock markets this year. The reason is that investors are still failing to think about political risk. They continue to believe, as they did a year ago, that nothing else matters as long as central banks continue to hand out large amounts of free cash to support stock markets.
But that was then, and this is now. And in reality, political risk is rising all around the world. We are seeing it most obviously in Greece, but it is also becoming a bigger factor in the UK ahead of May’s General Election – where it still seems unlikely that any single party can gain a majority .
Developments in the markets themselves also create cause for concern. The US market is now close to its record level in terms of Nobel Prizewinner Robert Shiller’s valuation metrics. And it is already at a record level of margin debt.
The reason is that investors have convinced themselves that the US Federal Reserve, like the European Central Bank, the Bank of Japan and the Bank of England, will never let stock markets fall again, for fear of another 2008 crash.
Thus investors, and the media and commentators who support their needs, spend all their time worrying about when US interest rates might rise, and by how much. Vast forests have been destroyed to provide the paper on which these learned discussions can take place: vast banks of servers have been built to provide their electronic equivalent.
Yet how much power do central banks really have over the world economy? Does the ability to raise or lower interest rates really enable them to control the economic tide? If it did, why are bond markets now so convinced that deflation is on its way in many major economies?
We are also already seeing corporate earnings being badly hit by the collapse of oil prices and the surge in the US dollar. And I remain convinced, as I have argued since August, that these developments are only the first stages of the Great Unwinding of central bank stimulus policy.
Last month, as the chart of the IeC Boom/Gloom Index above shows, the S&P 500 (red line) lost ground for a second month, causing US investment magazine Barron’s to comment:
“Stocks suffered their second straight monthly decline, while government bonds soared as their yields fell to record lows. April may be the cruelest month to the poet, but U.S. equity investors are down some $1.1tn since the market’s peak on Dec. 29. That includes a loss of $600bn last week and $300bn Friday alone, as the equity market failed to get the typical end-of-month lift from big players’ trying to burnish their monthly results.”
And at the same time, the Index itself (blue column) is sliding slowly but surely into serious downturn territory.
The blog’s latest post for the Financial Times FT Data blog is below.
September 20, 2013 2:47 pm by FT
Whilst the number of working women in the UK continues to rise, since 2009 their total earnings have been falling in real terms. With consumer spending contributing to roughly 60 per cent of the UK economy, this has important implications for the sustainability of the current recovery.
Nearly 14 million women are working today compared to nine million in 1971, whilst their participation rate in the workforce has increased from 59 per cent to 75 per cent today.
There has also been a sustained rise in women’s pay relative to men.
As the chart below shows (green line), relative pay rose temporarily during World War Two, but then fell back as women were pushed back into lower-paying jobs once male troops rejoined the labour market. The 1970s, however, saw the start of a sustained improvement, as the arrival of large numbers of babyboomer women began to break down existing barriers.
The Equal Pay Act of 1970 was thus followed by the 1975 Sex Discrimination Act and the Equal Opportunities Commission, and then by the limited introduction of maternity leave in 1978 under the Employment Protection Act. In turn, employers slowly began to accept that women could be interested in developing a career and in targeting more senior roles.
These major legislative and cultural changes led to women’s relative pay rising from 54 per cent to 79 per cent today. Whilst women’s average earnings rose nearly threefold between 1970 – 2009 from £11,000 to £30,000 (£2012). In turn, this created a virtuous circle for growth in the UK economy:
- New markets opened up as working women with children needed – and could now afford – more labour-saving devices for the home
- The emergence of dual-income households meant bigger-ticket items such as cars and houses became more affordable, as well a wider range of other consumer products.
But today, some of this progress seems to be unwinding. Women’s average earnings, like men’s, are now declining in real terms as the recession has hit earnings growth. Workers in Britain of both genders are in the sixth year of a squeeze on incomes.
Women’s earning fell to £27,000 last year, equal to 2001-02 levels, despite two trends identified by the Bank of England which should have supportive of higher earnings:
- Large numbers of Boomer women are now working longer, as their pension age rises between 2010 – 2018 to equalise with men’s and these older women should be close to their peak earnings
- Younger women are returning to work more quickly after childbirth. Their earnings should benefit from spending less time away from their career track
In fact, however, the total value of women’s earnings has fallen six per cent from £398bn in 2010 to £373bn in real terms (£2012), and is now back at 2005 levels. This is despite the increase in the actual numbers employed.
This decline is not just bad news for women themselves and for their families. It also reduces household spending power, and thus removes a critical source of support for the broader UK economy at an important moment in the recovery from the financial crisis.
Most of today’s executives and policymakers grew up during the SuperCycle. Many therefore continue to believe that a return to constant growth is somehow inevitable. Sadly, of course, they are doomed to disappointment.
And disappointment is the predominant message from the blog’s usual quarterly review of company results. Thus BASF note that “achieving our earnings target is significantly more challenging today than we had expected”. Equally, there is a widespread reluctance to accept that today’s economic downturn is secular and not just cyclical.
Most companies thus see the world as being in separate silos, and assume that weakness in Europe, for example, is somehow separate from the slowdown in China. In reality, of course, they are cause and effect – ageing European populations no longer to need to buy from China’s export-orientated economy. So China’s growth is inevitably slowing, and for the next 5 – 10 years it will remain slow, whilst it goes through the painful and difficult task of refocusing on domestic demand.
US-based companies have the hardest job in accepting this New Normal. The short-term demands of financial markets mean they have to run hard just to stand still. Sadly, therefore, many are using the windfall of lower natural gas prices to boost earnings today, rather than investing for the future. So they are ferociously continuing to cut costs and restructure. The alternative, of building new revenue streams for the future, would require increased spending to produce the new products and services that will be required – and therefore lower earnings today.
Air Liquide. “Costs associated with restructuring and layoffs in western Europe weighing on profitability”
Akzo Nobel. “Conditions remain tough and, as we have previously indicated, we do not expect an early improvement in the external trends our businesses are facing.”
Arkema. “Market conditions in Europe are challenging, in particular in France where growth prospects have deteriorated”
Ashland. “Sharply lower guar shipments for oil drilling”
Axiall. “This is clearly a different environment than we expected at the beginning of the year”
BASF. “Achieving our earnings target is significantly more challenging today than we had expected at the beginning of the year”
BP. “Margins and volumes are expected to remain under pressure for the rest of the year”
Bayer. “North American growth offset slumps in most other regions”
Braskem. “A rise in sales volume growth and a recovery in international resins spreads”
Brenntag. “We do not see the promise of any significant improvement in the macroeconomic environment”
Celanese. “Much of China’s industrial chemical market is in turmoil because demand has just not grown”
ChevronPhillips. “Plant outages and turnaround activity”
Clariant. “Expects stability in mature markets but rising uncertainties in emerging economies”
Croda. “Challenging trading environment has inevitably held back certain parts of the business”
DSM. “Nutrition business generated €249m in earnings, up 28% year on year”
Dow. “US continues to be a bright spot among the economies of the world”
Dow Corning. “Significant oversupply and high raw materials costs”
DuPont. “Considering alternatives for the performance chemicals business but had not yet made any decisions”.
Eastman. “Greater volumes from acquisition of Solutia”
Evonik. “Market conditions during the quarter were far more difficult than expected”.
ExxonMobil. “Volume and mix effects increased second-quarter chemical earnings by $120m”
Huntsman. “Many areas of the global economy continue to moderate or languish”
Kemira. “Net profit fell 88% partly as a result of €27m in restructuring fees and efficiency savings writedowns”
Kronos. “Continue to focus on initiatives to improve our global production efficiencies and manufacturing flexibility”
LG Chem. “Expects seasonal demand growth and the gradual recovery in the global economy”
Lanxess. “Trading conditions for our businesses remain tough and the fragile sentiment in Europe is now evident in other markets that are important for us, such as China and Brazil”
Linde. “An environment which is proving challenging to everyone”
LyondellBasell. “The environment for the rest of the year remains highly changeable”
Marubeni. “Deterioration of profits in the petrochemical product business”
Methanex. “Higher sales volumes and prices of methanol”
Mitsubishi Chemical. “Recovering domestic demand and improved export environment”
Nova. “Lower margins in olefins, partially offset by higher margins and increased sales volumes in polyethylene”
OMV. “Higher margins, lower sales”
Oxychem. “Continued weak economic conditions in Europe and slowing demand in Asia”
PPG. “Sales volume results were also mixed, similar to the respective regional trends”
Praxair. “Our on-site business continued to be very strong”
SABIC. “Cost cuts propped up margins even though sales revenue declined”
Siam Cement. “Strong performance in its chemicals business”
Shell. “Contributions from chemicals were lower as a result of the industry environment in Europe”
Shin-Etsu. “Robust PVC shipments by its US subsidiary to central and South America”
Solvay. “Decisions by some of our customers to delay investments”
Tosoh. “Production and domestic shipments of olefin products including ethylene and propylene increased”
Tronox. “Selling prices are showing signs of stabilising”
Versalis. “Weak commodity demand impacted by the current economic downturn as well as declining benchmark cracking margins”
Wacker. “Persistently difficult market and competitive environment”
Wanhua. “Expecting higher revenues following completion of technical upgrade of MDI plant in Ningbo”
Household consumption is 60% of western GDP. So any economic forecast that simply assumes it will always increase is likely to prove badly wrong as BabyBoomers move into retirement. Of equal importance is the impact of women’s role in the workforce. They added a major boost to demand during the Supercycle, as dual-income households became common for the first time.
The interest in last week’s post on the US jobs market has encouraged the blog to research this critical issue in more detail. And as the chart shows, UK data provides vital historical evidence highlighting the major change in women’s pay relative to men that took place after 1970:
• The 1970s saw large numbers of Boomer women enter the workforce for the first time
• This led to women’s pay rising relative to men’s (green line) from 45% to 80% today
• The 1970 Equal Pay Act supported this move by mandating equal pay for equal work
• The 1975 Sex Discrimination Act stopped married women being forced to leave their jobs
This was quite different from the 1938-1970 period. Many women had temporarily joined the workforce during World War 2. But they left again as the men returned home. Their pay ratio to men also fell back to pre-War levels, and was only 49% in 1968.
Unsurprisingly, this major change encouraged more women to join the workforce. Their participation level rose from 61% to 83% today. And their new ability to stay in the workforce after marriage led to the rise – for the first time in history – of dual-income families. In turn, this led to sustained increases in household consumption and western GDP.
Today, however, a new cycle is underway. Since 2010, as the chart also shows, wages for men (blue line) and women (red) have been falling in real terms (£2012) for the first time. Companies have chosen instead to boost short-term profits to support their share prices. But, of course, falling wages mean lower spending and lower GDP growth for the future.
Equally, increasing numbers of male and female Boomers are now retiring. Men’s participation in the labour force is already in long-term decline. Now the boost to consumption provided by Boomer women will reverse, as they begin to retire from the workforce.
Nothing lasts for ever. The rise of dual-income families in the West provided a major boost to consumption and growth through the SuperCycle. But now we are clearly in transition to a New Normal, as Boomer women move into their low-spending years.