Ageing Perennials set to negate central bank stimulus as recession approaches

The world’s best leading indicator for the global economy is still firmly signalling recession.  That’s the key conclusion from the chart above, showing latest data on global chemical industry Capacity Utilisation (CU%) from the American Chemistry Council.

The logic behind the indicator is compelling:

  • Chemicals are one of the world’s largest industries, and also one of the most diverse
  • Every country in the world uses relatively large volumes of chemicals
  • And their applications cover virtually all sectors of the economy
  • They include plastics, energy and agriculture as well as detergents and textiles

If you want to know the outlook for the global economy, the chemical industry will provide the answers.

It also has an excellent correlation with IMF data, and benefits from the fact it has no “political bias”. It simply tells us what is happening in real-time in the world’s 3rd largest industry.

And now it is telling us that the CU% is continuing to fall. It was down at 83.1% in January, well below the long-term average of 86.5%.  In fact, it has fallen sharply from that level since December 2017.

Ironically, it was exactly a year ago that the world’s major central banks were congratulating themselves on the success of their policies. “Yes”, they said, “it had taken longer than expected, but we can finally declare victory for our post-2008 stimulus policies”.

Unfortunately, however, this confidence was misplaced as the second chart suggests.

It shows there was a brief rebound in 2010 after the 2008 Crisis as the first round of stimulus took place. But then growth fell back again.

Instead of learning the lesson, the banks decided to do more of the same.  But repeating the same action in the hope of a different result is not terribly sensible.  And so it has proved.

Next month will see the IMF’s new estimate for 2018’s GDP growth (black line). Chemical industry CU% data (the red line) suggests it will have to be revised downwards, once again.

Already, it seems, the central banks are preparing their next round of stimulus. They have finally recognised the slowdown underway in the key areas of the economy such as autos, housing and electronics:

  • China has already panicked, with January seeing record levels of loans
  • Similarly the US Federal Reserve has promised it will go slowly with any further interest rate rises, or might even reduce them
  • The Bank of Japan’s former deputy governor has warned of recession as global demand weakens
  • Most recently, the European Central Bank has completely reversed course, after suggesting as recently as December that strong growth meant further stimulus was unnecessary

As the 3rd chart shows, the key aim for the western central banks is simply to support stock markets such as the S&P 500. They are determined to keep them moving steadily upwards, in the belief this will stimulate growth. But this, of course, is wishful thinking.  As the Financial Times reported last week, the combined result of stimulus and President Trump’s tax cuts has been that:

“US companies handed their shareholders a record-shattering $1.25tn through dividends and buybacks last year, lifting the post-crisis bonanza to nearly $8tn.”

And as the independent Pew Research Center reported last year:

“Today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago. And what wage gains there have been have mostly flowed to the highest-paid tier of workers.”

YOU CAN’T PRINT BABIES – AND IT IS PEOPLE THAT CREATE DEMAND

The final chart highlights the “problem” for the central banks.  Their financial models, and all their thinking, are based on the experience of the post-1945 BabyBoomer SuperCycle.

The vast numbers of babies born between 1946-70 first created massive inflation in the 1960s-70s, as demand outstripped supply. But then they created more or less constant growth as the Boomers moved into the workforce. They turbo-charged demand as Western women stopped having enough children to replace the population after 1970, and instead went back into the workforce – creating the two-income family for the first time in history.

But after 2000, this growth began to weaken as the oldest Boomers moved out of the Wealth Creator 25 – 54 age group, when consumption peaks along with earnings.  And today’s “problem” is really that, wonderfully, we now have a entirely new generation of Perennials aged 55+.

They will soon be over one-fifth of the global population, double the percentage in 1950.  In the developed western economies, they are already a third of the population, due to the collapse of fertility rates.  This is great news for us as individuals. But it is bad news for economic growth as Perennials already own most of what they need, and their earnings reduce as they retire.

The S&P 500 and other asset markets are already rising due to central bank promises of more support.

But one thing is certain. Third time around, the main result of more stimulus will again be to increase today’s already high levels of debt and inequality.  It cannot return us to SuperCycle levels of growth.

BASF prepares its UK supply chain for Brexit

BASF has been working with Ready for Brexit (the online platform I co-founded last year) as part of its programme to prepare its UK supply chain for Brexit.  Here, Ready for Brexit’s editor, Anna Tobin,  reports on the workshops that BASF has been running this month for SMEs.

The world’s largest chemical business, BASF, has a large network of companies in the UK. Over the last few weeks, it has run a series of workshops for those working in its supply chain to ensure that its UK infrastructure is as ready as possible for Brexit.

Of all the UK’s industrial sectors, the chemical industry is likely to be one of the worst hit by a no-deal Brexit. It contributes £15bn annually to the UK economy and it is the UK’s largest manufacturing exporter, with 60% of its exports going to the EU. As the lynchpin of this industry, BASF is doing everything it can to prepare the UK’s chemical industry for Brexit. Working with the Government and in collaboration with every link in its supply chain has been the focus of BASF’s Brexit preparations.

BASF has worked closely with Ready for Brexit to highlight key areas for attention to its SME partners. Over the last month, it has run a series of workshops for SMEs in its supply chain involving presentations and question and answer sessions with Government advisors, senior figures at BASF, logistics and customs experts.

Logistics
Bill Bowker, director of transport and warehousing company Bowker Group, which has been working with BASF since 1986, headed one workshop. He explained to his audience that as part of his Brexit contingency planning he has increased his storage space and staffing, obtained ECMT permits and ensured that his drivers have international driving licences and green cards; while he is advising his customers to increase their stock levels and ensure that all shipping information is correct to minimise delays.

Abram Op de Beeck, BASF’s customs and foreign trade manager, advised attendees to get an EORI number as soon as possible, to sign up for Transitional Simplified Procedures for customs and to consider appointing a customs agent to simplify the management of their customs declarations.

DEFRA
Alun Williams, who is working on EU exit for chemicals and pesticides at the Department for Environment Food and Rural Affairs (DEFRA), explained that the Government is working to ensure that any new UK regulatory systems will mirror the existing EU systems as far as possible to minimise costs to industry. He also said that they were endeavoring to minimise disruption to integrated supply chains for chemicals, will continue to monitor and evaluate chemicals in the UK to reduce the risk posed to human health and the environment; and that they would be maintaining existing standards of protection for human health and the environment.

He conceded that businesses looking to operate in the UK and EU markets will have to work with two regulatory systems. To maintain access to the EEA market, UK REACH registration holders will need to transfer their registrations to an EEA-based organisation. And to maintain UK market access to existing UK-based REACH, registrants must sign up to the new UK IT system in the first 120 days of the UK leaving the EU. The other alternative is to ask your EU/EEA supplier to appoint a UK-based Only Representative to ensure UK REACH compliance.

Williams explained that to register a new chemical for the EEA market, UK companies must register with ECHA via an EEA-based customer or Only Representative. To register a new chemical for the UK market, UK companies must set up an account on UK REACH IT and register the new chemical.

BEIS
Fiona Hitchiner, senior policy advisor chemicals at the Department for Business Energy and Industrial Strategy (BEIS), pointed people towards the Government’s tariff checker and advised them to review their contracts and International Terms and Conditions of Service to show that they are now an importer/exporter and to establish responsibilities with their suppliers and customers. She also reminded attendees to check whether they could save money and help cash flow by using a duty relief or deferment scheme and reiterated the need to obtain an EORI number and to register for Transitional Simplified Procedures.

The day-long workshops were full on, but that is why BASF has put on these events. It wants to get the message across that there is a lot to do to prepare for a no-deal Brexit, and that preparation is vital to minimise the expected ill-effects.

Companies and investors have just 30 working days left to prepare for a No Deal Brexit

Companies across the UK and EU27 are suddenly realising there are now just 30 working days until the UK will likely abandon its 45-year trading relationship with the EU, and start to trade on WTO terms.

If this happens, every supply chain involving a movement between the UK and EU27 will change. And all those supply chains governed by EU deals outside the EU will also change. A large number of industries are already being impacted:

  • Scotch whisky exports to Korea worth £71m ($90m) a year, risk a 20% tariff after 29 March if the EU’s Free Trade Agreement is replaced by WTO rules. It is now too late to export by boat, causing some exporters to use expensive air freight to beat the deadline. But capacity is already almost full.
  • Many banks, insurance companies and asset managers have already moved staff from London into the EU27.  They cannot risk waking up on 30 March to find they can no longer serve customers from London, because they have lost the essential EU “passport”.
  • “CE Marks” issued in the UK will no longer be valid in the EU27 after No Deal  – making it difficult to sell any goods that need safety, health or environmental approval.
  • And last week, BASF’s UK MD, Richard Carter, told Ready for Brexit that for the world’s largest chemical company: “The thought of having to re-register with a UK REACH equivalent if there is no deal and if there is no recognition equivalence is a huge concern”.

THE UK REMAINS ON COURSE TO LEAVE THE EU WITH NO DEAL ON 29 MARCH
But surely, you say, “this cannot happen”.  After all the UK’s main business organisation, the Confederation of British Industry, has already warned that No Deal would create “a situation of national emergency“.

But the leading Tory Brexiters don’t believe this.  Their 111 votes, combined with the 10 votes from the Democratic Unionist Party, meant premier May’s Withdrawal Agreement was defeated by 230 votes last month.  It would have provided a Transition Agreement until the end of 2020.

However, their votes then swung behind her to defeat the motion of No Confidence in the government, which would have led to a general election.  Why did they do this, you might ask, given they had just voted against her key policy?

The answer is that the Brexiters have a completely different view of the Brexit negotiations, as I noted in The pH Report last year.

They simply don’t accept the CBI argument. Instead they believe the EU27 will be the main losers from No Deal as they argue the financial outcome will be:

“Plus £651 billion ($875bn) for the UK versus minus £507bn for the EU: it could not be more open and shut who least wants a breakdown.“

In their view, the best way to force the EU27 to offer a better deal is simply to leave on 29 March.

They also, as I noted here in December, will be quite happy to see the end of key industries such as autos, as the leading Brexiter economist Prof Patrick Minford told the Treasury Committee in October:

You are going to have to run it down … in the same way we ran down the coal industry and steel industry. These things happen.”

The alternatives to No Deal are now also extremely limited.  The Caroline Spelman/Jack Dromey resolution to block No Deal was passed last month by 8 votes. But it was only a resolution and has no legal force.

Of course, Parliament might change its mind and decide to vote for May’s Agreement.  Or the government might revoke its Article 50 notification before the UK leaves on 29 March. But both would split the Tory and Labour Parties and are unlikely to happen.

The government could also decide to hold a second referendum. But again, this would split both parties and is unlikely.

It is therefore hard to disagree with the independent Institute for Government, who concluded: “Britain’s politicians are unwilling to put jobs and the economy above party politics.

The only other option is for MPs to effectively take over the government by demanding that it stops No Deal.  It is not clear how this could happen, but presumably they could pass legislation demanding that May asks Brussels for a lengthy extension to Article 50.

But such a move by Parliament has never happened before. It would need key Ministers such as Chancellor Philip Hammond to vote against their own government. It would also need support from enough Opposition MPs to overcome Brexiter resistance.

It would also risk a constitutional crisis, as it would replace an elected government.  And in terms of practicalities, it would presumably also mean that the UK would take part in the EU Parliament elections, as it would still be a full EU member in May. The whole process would take the UK into completely uncharted water.

THERE ARE JUST 30 WORKING DAYS LEFT TO PREPARE FOR A NO DEAL BREXIT

Anticipating this risk led me to co-found Ready for Brexit last year, to help businesses navigate the challenges and opportunities created by Brexit.

It is effectively the one-stop shop requested recently by the CBI.  It provides curated links to all the areas where you may need to urgently prepare for Brexit.

The video explains what WTO rules could mean for your business. Please watch it now, and then decide if you need to start planning today for whatever may happen on 29 March.

The BoE’s pre-emptive strike is not without risk

The Financial Times has kindly printed my letter below, arguing that it seems the default answer to almost any economic question has now become “more stimulus” from the central bank.

After 15 years of subprime lending and then quantitative easing, last week’s warning from the Bank of England suggests there are fewer and fewer economic questions to which the default answer is not “more stimulus”.

But it is still disappointing to find the Financial Times supporting this reflex reaction when considering the risks associated with Brexit next month (“Bank of England must grapple with the risks of a no-deal Brexit”, February 6). Nobody would dispute that the bank has a critical role in terms of ensuring financial stability through the Brexit transition. As the FT says, the “potential outcomes are discrete and the impacts vary widely”.

But the bank has already fulfilled this role by publishing its November assessment of the no-deal risks for government and parliament to consider. There is therefore no justification for the bank to pre-emptively impose its views by deciding to keeping interest rates artificially low.

The political risks associated with such an intervention would be large, particularly if the bank’s assessment or its proposed solution proves wrong. And there is also the risk of unintended consequences.

The history of stimulus does, after all, suggest that the only certain outcome of lower interest rates would be a further rise in today’s already sky-high level of asset prices.

Paul Hodges
The pH Report

Flexible working is key to reversing today’s collapse in fertility rates

Women in most parts of the world are not having enough children to replace our population. This is one of the great issues of our time, but is hardly ever discussed.

Yet the issue is very topical, with Chinese births falling to a 60-year low last year.  Only 15.23 million babies were born, the lowest level since 1961 when the population was 654 million, less than half today’s 1.4bn. Soon, deaths will start to overtake births – as they have already in Japan.

It used to be thought that China was a special case due to its “one child policy”, pictured above. But this law was relaxed in 2015.  And although births did rise in 2016, as some couples took advantage of the new law, forecasts that births could reach 23m in 2018 have proved completely wrong.

FERTILITY RATES HAVE COLLAPSED AROUND THE WORLD

China is not alone, however, in seeing its fertility rates collapse, as the chart of the world’s 10 largest economies confirms.  It shows the number of babies/woman being born since 1950, based on UN Population Division data:

  • Asia.  China’s rate has fallen from 6 to 1.6; India from 5.9 to 2.2; Japan from 3 to 1.5
  • Americas.  Brazil has fallen from 6.1 to 1.7; Canada from 3.6 to 1.6; USA from 3.3 to 1.9
  • Europe. The UK has fallen from 2.2 to 1.9; Italy from 2.4 to 1.5; France from 2.8 to 2; Germany from 2.1 to 1.5

So only India is now above the replacement level of 2.1 babies/woman. And probably this will change within the next 5 – 10 years as latest national data shows that 12 states are already below replacement levels, whilst urban areas are at just 1.8 babies/woman.

Of course, part of the reason is increasing life expectancy – women don’t  need to have a baby every year to ensure someone is there to look after them when they grow old.

This was critical even 200 years ago, when life expectancy was just 30 years. But after the discovery of smallpox vaccination, Rising life expectancy enabled the Industrial Revolution to occur and today, life expectancy has more than doubled.

In turn, of course, today’s ageing populations are creating major headwinds for growth, as I discussed in Economic policy needs to focus on impact of the 100-year life.  This is particularly critical in wealthier countries, given that the West faces a demographic deficit as population ages.,

But another key – and related – issue is the collapse in fertility rates itself.

POLICIES HAVE TO CHANGE IF FERTILITY RATES ARE TO RECOVER 

It is easy to forget today that it is only within the last 100 years that men began to accept that women could play a full role in society.  It was exactly a century ago, for example, that resistance to the idea of women voting began to crumble.

The catalyst for change was World War 1. With men having gone to fight, women had to be allowed to leave the home and go to work.  And when the men came back, they felt unable to stop the move to allow women to vote.  But this didn’t stop men enforcing marriage bars until the 1960s.

These meant that Western women would routinely lose their job when they got married, on the grounds that “it was the man’s job to earn the income, whilst the woman stayed at home with the children“.  And, of course, women’s lives and ambitions were still restricted in a vast number of ways.

THE COST OF HAVING CHILDREN IS TOO HIGH FOR MANY WOMEN

Today, the collapse of fertility rates should be seen as a critical issue for society.  Of course, not every woman wants to have children. But for those that do, there are at least 2 types of cost that currently discourage them.

One “cost” is simply the high cost of living.  In China, for example, Caixin notes that

“High parenting costs are severely inhibiting. For example, in a typical Chinese middle-class family, the average annual cost of raising a child is about 30,000 yuan ($4,400).”

This is higher than China’s average per capita disposable income at just $4165 in 2018, according to government data.

But there is another “cost” that women have to face if they want to have children.  This is that job conditions are still based on the pre-1960 pattern. As a recent survey by the UK parenting site, Mumsnet, reports:

“Three-quarters of parents found flexible working — including part-time hours, job shares and reduced hours during school holidays — more important to them than perks such as health insurance and gym membership, and more than half of them valued it over getting a pay rise.”

Tech companies seem particularly bad in this area, as one mother wrote recently about working at Facebook:

“I love my job, but I love my baby even more. When I told Facebook I wanted to work from home part-time, HR was firm: You can’t work from home, you can’t work part-time, and you can’t take extra unpaid leave…..Zuckerberg said he was sorry I was leaving.

Most companies still operate a version of the same out-of-date policies. It’s time that they, and governments, began to wake up to the consequences. Common sense tells us that everyone would benefit from introducing more flexible working arrangements. And it is also the only way that we will get back to replacing our population, before it is too late.

No Deal Brexit remains UK law unless MPs reverse their previous votes

That couldn’t happen” are probably the 3 most dangerous words in the English language. They mean “I don’t want to think about something that might be painful“. So if you hear MPs saying a “No Deal Brexit can’t happen“, ignore them. They are wrong.

‘NO DEAL’ BREXIT IS THE LAW OF THE LAND
The issue is simple, yet seemingly too painful for most MPs and commentators to accept.

The EU Withdrawal Act (2018) became law on 26 June last year.  It set 29 March 2019 as Brexit Day.  It allowed for a Transition Agreement if a Withdrawal Agreement was agreed. Without a Withdrawal Agreement, the UK simply leaves with No Deal.

The law is the law, and the Act is primary legislation, which means it has since been incorporated in a whole range of laws and regulations as part of the UK’s exit preparations.  It cannot, therefore, be overturned by statements that claim “There is no majority for No Deal”.

In fact, during the Committee stage, the House of Commons voted 320-114 in Committee Stage against staying in the Customs Union.  It also voted 319-23 against a second referendum. And last week, MPs voted 432-202 against the proposed Withdrawal Agreement.

So if MPs say “No Deal can’t happen”, they are wrong. They have already voted for ‘No Deal’.

CHANGING PRIMARY LEGISLATION IS VERY HARD

Of course, MPs could still change their minds. But there are now less than 70 days till Brexit.  And they would also have to agree this with the other EU 27 countries.  These represent nearly 450 million people versus the UK’s 66 million.

Equally important is that the UK has been heading in this direction since negotiations started:

Since then, MPs have voted for the Withdrawal Act; against remaining in a Customs Union; against a new referendum; and against the Withdrawal Agreement. They have also voted for invoking Article 50 and for setting 29 March 2019 (by 498-114 votes) as Brexit Day.

So time is running out for them to change their minds.

THE ALTERNATIVES TO ‘NO DEAL’ ARE CURRENTLY WISHFUL THINKING

The politics of Brexit also make it unlikely that the government will change its mind, or be forced to change its mind:

  • Theresa May knows very well that any move to “soften” Brexit by joining a Customs Union would split her Conservative Party down the middle. And any Tory MP who voted for a softer Brexit knows they would likely be deselected as a candidate and lose their job
  • Labour leader Jeremy Corbyn voted to leave the EU in the 1975 referendum, and against the Maastricht/Lisbon Treaties. Many traditional Labour voters are also strongly pro-Leave. So any Labour MP voting against the Party line also faces the risk of deselection

It is therefore hard to see why simply extending Article 50 beyond 29 March would change anything.

And extending would enormously complicate the European elections in May. At the moment, the UK is not taking part in these, as it is leaving on 29 March. But if it isn’t leaving after all, there is little time left to prepare to vote on 23 May

Of course, the EU27 might agree an extension if the UK decided to hold a second referendum, as long as the vote was held before the new Parliament starts work on 2 July. But they would likely first want to know the question on the ballot paper.

Would the government ask if the voters approved of May’s Withdrawal Agreement? Would it instead ask if they wanted to stay in the EU? Or would it simply ask if they wanted to leave with No Deal?

Any of these questions are possible.  But deciding between them could be very divisive in itself.  And a referendum campaign could be even more divisive.  Plus, its outcome would be very uncertain if voters worried that democracy was being undermined by a refusal to accept the first result.

“A week is a long time in politics” as former premier Harold Wilson famously noted.  So it is possible that Sir Keir Starmer’s call yesterday for a new Labour approach might succeed.  Equally, MPs might decide to support the Nick Boles and/or the Dame Caroline Spelman/Jack Dromey motions next week.

But this would only be the start of a quite complex process, which might well end with a General Election being called – and all the while, the clock is ticking.

So after the government’s defeat on Tuesday, UK businesses and those that trade with the UK must urgently begin to plan on the basis that a No Deal Brexit on 29 March is now UK law. 

Please consider joining Ready for Brexit today (the advisory service I co-founded in June). It is effectively the one-stop shop requested by the CBI, and provides curated links to all the areas where businesses may need to prepare for Brexit.