Next week, I will publish my annual Budget Outlook, covering the 2018-2020 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“
The 2010 Outlook was ‘Budgeting for Uncertainty’. This introduced the concept of Scenario planning, to help deal with “today’s increasingly uncertain New Normal environment.”
2011 was ‘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 ‘Budgeting for an L-shaped recovery’, arguing that recovery was unlikely to meet expectations
2013 was ‘Budgeting for a VUCA world‘ where Volatility, Uncertainty, Complexity and Ambiguity would dominate
2014 was ‘Budgeting for the Cycle of Deflation‘, 2015 was ’Budgeting for the Great Unwinding of policymaker stimulus’, 2016 was ‘Budgeting for the Great Reckoning’
Please click here if you would like to download a free copy of all the Budget Outlooks.
My argument last year was that companies and investors would begin to run up against the reality of the impact of today’s “demographic deficit”. They would find demand had fallen far short of policymakers’ promises. As the chart shows, the IMF had forecast in 2011 that 2016 growth would be 4.7%, but in reality it was a third lower at just 3.2%. I therefore argued:
“This false optimism has now created some very negative consequences:
Companies committed to major capacity expansions during the 2011 – 2013 period, assuming demand growth would return to “normal” levels
Policymakers committed to vast stimulus programmes, assuming that the debt would be paid off by a mixture of “normal” growth and rising inflation
Today, this means that companies are losing pricing power as this new capacity comes online, whilst governments have found their debt is still rising in real terms
“This is the Great Reckoning that now faces investors and companies as they plan their Budgets for 2017 – 2019.”
Oil markets are just one example of what has happened. A year ago, OPEC had forecast its new quotas would “rebalance the oil market” in H1 this year. When this proved over-optimistic, they had to be extended for a further 9 months into March 2018. Now, it expects to have to extend them through the whole of 2018. And even today’s fragile supply/demand balance is only due to China’s massive purchases to fill its Strategic Reserve.
Policymakers’ unrealistic view of the world has also had political and social consequences, as I noted in the Outlook:
“The problem, of course, is that it will take years to undo the damage that has been done. Stimulus policies have created highly dangerous bubbles in many financial markets, which may well burst before too long. They have also meant it is most unlikely that governments will be able to keep their pension promises, as I warned a year ago.
Of course, it is still possible to hope that “something may turn up” to support “business as usual” Budgets. But hope is not a strategy. Today’s economic problems are already creating political and social unrest. And unfortunately, the outlook for 2017 – 2019 is that the economic, political and social landscape will become ever more uncertain.”
As the second chart confirms from Ipsos MORI, most people in the world’s major countries feel things are going in the wrong direction. Voters have lost confidence in the political elite’s ability to deliver on its promises. Almost everywhere one looks today, one now sees potential “accidents waiting to happen”.
Understandably, Populism gains support in such circumstances as people feel they and their children are losing out.
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.
Next week, I will look at what may happen in the 2018 – 2020 period, and the key risks that have developed as a result of the policy failures of the past decade.
The post The Great Reckoning for policymakers’ failures has begun appeared first on Chemicals & The Economy.
Next month sees the start of a process that could change all our lives. Whether we live in Europe, or outside it, the political decisions about to be made have the potential to impact every country in the world – for better or worse.
And yet, nobody has yet begun to put together the various pieces of the jigsaw, and identify the wide range of different outcomes that could emerge. By the end of the year, the EU and the eurozone might have collapsed – with massive impact around the world. Or ‘business as usual’ might continue. Or we might have a revived French-German partnership again, reigniting the energy that first began to rebuild Europe after World War 2. None of us know, and it is very dangerous to keep pretending that ‘business as usual’ is the only option.
The changes are so vast, and so different in their potential outcomes, that I will explore them in two separate posts this week. Today, I will look at Brexit and the current outlook for the Dutch and French elections. On Thursday, I will look at the outlook in Italy and Germany, and draw some conclusions about what may happen.
Brexit is the first unknown. The UK expects to start the process of leaving the European Union (EU) next month. Premier Theresa May has now published the government’s position on the talks. But what will happen when she presents her terms in Brussels? She wants to retain access to the Single Market for critical UK industries such as financial services, autos, aerospace and chemicals – but she doesn’t want to allow immigration to continue on the current basis, and she probably doesn’t want to pay the €60bn bill that Brussels believes she will owe on leaving.
So what will happen? Will it be sweetness and light, with everyone singing “For she’s a jolly good fellow” as she walks out the door? Or will there be furious arguments, and no agreements for UK trade in the post-Brexit world? And what will happen back in the UK while all this takes place? Will businesses simply sit back? Or will some decide it would be prudent to move to France, Germany, Ireland or elsewhere? And what might happen in Parliament, where May only has a majority of 12, if things go badly? Could her term as premier end up being one of the shortest on record?
The Dutch elections are the next unknown on 15 March. Geert Wilders, the anti-immigration, anti-EU candidate for premier, is currently leading in the polls. But will he do better, or worse, when the time comes to actually vote? As we know from the Brexit and US Presidential elections, the polls are not always accurate – if people who have not voted in the past, now decide it is time they went to the polling station. And if Wilders does win, will he be able to form a government? Current premier, Mark Rutte, has said he will refuse to work with him. So it could be a very lengthy process before The Netherlands has a new and stable government.
And what would happen if Wilders did become premier? His main policy is leaving the EU. On what terms would he seek to do this – would he adopt the same positions as Theresa May, or would he have different priorities? And would the EU itself survive the departure of one of its original 6 members? Many people think it wouldn’t.
France’s presidential elections are next, on 23 April. French polls were completely wrong in the primaries – Alain Juppé was defeated by Francois Fillon for the Republican nomination, Manuel Valls was defeated by Benoît Hamon for the Socialist nomination. At the moment, Emmanuel Macron with his new En Marche! movement, and Marine Le Pen of the National Front, seem likely to go through to the final round. Their outsider status is critical to their appeal, but their policies couldn’t be more different. Macron wants to revive the EU, le Pen wants to leave it.
What would happen if Le Pen wins? Almost certainly, the EU would collapse – whether or not Wilders had already begun the process. And what would that mean for the European and global economies? What would happen to the value of the euro? What would happen to the euro itself? Would all the break-up decisions be taken rationally, or would they happen late at night, after bitter argument?
What about the alternative, a win for Macron – who only declared his candidacy in November, and is still forming his new party? He has recognised that the curo cannot survive in its current structure, and has argued the EU should develop “a roadmap for Europe” in critical areas including defence, security and the economy. If fellow social democrat, Martin Schulz, were to be elected Chancellor in Germany in October, the stage could be set for a dramatic reshaping of EU policy – and probably also its membership. The contrast with Ms le Pen’s plans couldn’t be stronger.
GREAT UNKNOWNS LIE AHEAD OF US
These uncertainties would be difficult enough to manage on their own. Brexit itself is a complete unknown, effectively tearing up the last 43 years of UK law and economic policy. But it could easily be over-shadowed by developments in The Netherlands and France. If either or both decide to leave the EU, who really knows what would happen to the European and global economy, the value of European currencies, or Europe’s relationships with the rest of the world?
But these uncertainties are only part of the Great Unknowns now ahead of us.
On Thursday, I will look at the highly uncertain political outlook in Italy and Germany. I will also highlight the very different possible outcomes from Europe’s plunge into the Great Unknown – which has the potential to impact all of us, whether we live in Europe or elsewhere.
The European petrochemicals industry is in crisis. Operating rates dropped below 85% in H2 2008, and have never recovered. Now there is a danger that it faces death by a thousand cuts. This would be a tragedy for the European economy, as it would imply the loss of tens of thousands of well-paid jobs along the value chain.
The blog’s new article in this week’s ICIS Chemical Business argues that it doesn’t have to be this way. It looks back from 2017, to highlight the likely disastrous outcome of continuing with a ‘business as usual’ strategy’ . It argues the industry needs instead to take a new, forward-looking, direction to ensure a prosperous and sustainable future.
Dateline Brussels, 1 January 2017
“The European petrochemical industry is still reeling from the closure of several major production units over the past 18 months. And senior figures fear there may be many more to come. That is the grim prospect ahead as we start 2017.
“Yet looking back, it is clear that these closures were by no means inevitable. We simply failed to realise that demographic changes had completely changed demand patterns. When we should have been focusing on the new opportunities these would create, we were instead allowing ourselves to be defeated by the short-term challenges they created.
“Today, in 2017, we all know that spending has declined due to the ageing Western population. And there aren’t enough younger people to replace their lost demand, given that global fertility rates have fallen 50% since 1950. But if in 2014 we had looked forward, we would instead have focused on the fact that global life expectancy had increased 50% since 1950. People no longer died at the age of 50 in developing countries, or at 65 in the West. So a whole new market was opening up for the first time in history…..
”What could we have done to create a different and more prosperous future? Four key issues jump out at us today:
- Feedstock structure. Grangemouth highlighted the need for major change in the industry’s 1960s-based structure. Companies needed to focus on securing alternative hydrocarbon-based feedstocks from gas and bio sources, instead of assuming that oil would remain the prime component
- Market focus. We also needed to develop a market-focused approach, and move away from traditional concepts of commodities and specialties. This would have enabled us to successfully identify the new products and services required by the ageing BabyBoomers
- Government partnerships. In addition, we needed to learn the lesson from the Grangemouth and PVC experiences, and develop real partnerships with government at regional, national and EU-level
- European dimension. We also needed to establish national and European initiatives within the appropriate legal boundaries. This would have avoided the damaging domino-effect amongst suppliers and customers created by ad hoc individual closures. We were wrong to assume that creative collective solutions would have been regulatory “no-no’s”
“Many now argue that we have proved unworthy successors to the executives of the 1970s. They had faced oil price embargoes, major financial market crashes, and the continuing threat of nuclear oblivion from the Cold War. But, unlike us, they had constantly focused on creating and exploiting opportunities for the long-term. They were the ones who created the market which we have failed to maintain.”
Please click here to download a copy of the full article. The blog also looks forward to discussing its analysis with readers attending the EPCA Conference in Vienna this weekend.
WEEKLY MARKET ROUND-UP
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
Brent crude oil, down 12%
Benzene Europe, down 4%. “There were estimates of 15,000-20,000 tonnes of US benzene being shipped across the Atlantic for arrival in the second half of October”
Naphtha Europe, down 10%. “There is tepid demand in Europe and beyond, and a supply glut in heavier grades of naphtha is expected to extend into October”
PTA China, down 11%. ”Buyers were mostly adopting a wait-and-see stance, in anticipation for further price declines, only purchasing on a hand-to-mouth basis”
US$: yen, up 4%
S&P 500 stock market index, up 8%
HDPE US export, up 13%. “European prices are more reflective of the true value of PE as US values are very distorted because of high ethylene prices”
Benzene has always been one of the blog’s favourite leading indicators for the global economy. The reason is simple, in that it has been around a long time, and is now used in a very wide range of industries. So it provides us with a broad-based picture of the global economy.
The chart above highlights another important factor, that we have a continuous history of its production going back to 1960, when oil-based production first became a major source of supply*. Before this, coal had been the feedstock. It shows:
- 1950-75 saw average growth of 9%/year, as markets developed rapidly under the influence of low prices and increasing availability
- Annual volume thus soared from 4.2MT/year to 15.6MT/year, with major growth in N America, W Europe, Japan and E Europe
- Then the first and second oil crises, when oil prices hit $50/bbl ($2012) and $100/bbl ($2012), brought a temporary end to growth between 1975-80
- Demand increased again as the arrival of the BabyBoomers in their peak demand years led to the growth SuperCycle between 1983-2007
- Annual volume rose 4%/year from 15MT/year to 41MT/year over the period
- Asia became a major source of output as China briefly became the manufacturing capital of the world, supplying goods to the West
- But growth has since slowed sharply as central bank stimulus has taken oil prices back to $100/bbl, whilst the Boomers increasingly join the New Old 55+
The oil price is clearly a major headwind, which will probably only prove temporary. History shows that the economy simply cannot support oil prices above $30/bbl.
But the loss of demand as the Boomers move into their New Old phase will likely prove a long-lasting constraint on growth. The world has never before seen large numbers of people in this generation – life expectancy in 1950 was still only 47 years, compared to 70 years today. And in the wealthy Western countries, the New Old are already 35% or more of the adult population. They not only don’t need to buy many new things, but their incomes are declining as they enter retirement.
The benzene market thus provides a valuable snapshot of economic development over the past 50 years. It also suggests it is unlikely that stimulus programmes can overcome the impact of the major generational changes now underway in the global economy.
Europe goes on holiday during August, so we have to wait – with not quite breathless anticipation – until September to see official ACEA auto sales figures for July and August.
Unfortunately, they contained no real surprises. July (red square) managed a small increase versus 2012 levels (green line), but August sales then fell back again. Overall, sales so far in 2013 are down 5% at 7.8m – the lowest figure ever reported since records began in 1990. And they are 20% below the peak sales level seen in 2006. They have fallen every year since then. In terms of the major markets:
- France is down 10% versus 2012; Italy down 9%; Germany down 7%; and Spain down 4%
- Only the UK is seeing an increase, up 10%, as its borrowing-led economic recovery continues
- Across Europe, bicycle sales are rising towards 20m, whilst cars sales are falling below 12m
Once again, there are no prizes for guessing the two brands that continue to outperform. Sales of Renault’s low-cost Dacia are up 18.7% this year at 160k. Whilst at the other end of the price range, Jaguar sales are up 18.6% at 14k.
This is further evidence for the argument that the profitable ‘middle ground’ of the SuperCycle is disappearing as we transition to the New Normal. Affordability is now the critical factor in the mass market, whilst niche brands such as Jaguar are clearly focused on the relatively small luxury market.
One of the key reasons is that people’s need and desire to own a car is reducing. Young people simply cannot afford a car with current insurance costs, even if they have a job. Whilst ownership rates in the cities are dropping fast. As the Wall Street Journal notes:
In Europe there are 500 cars on average for 1,000 inhabitants, a very high density. But in cities like Paris, car-ownership has fallen to 280 cars per 1,000 inhabitants, the same density as Poland and half of what it is in the rest of France.
The lines of parked cars in the cities also highlight how the average car is used for only 1 hour per day (based on average UK driving speed of 23.4mph – 37.7kph). Whilst official UK data shows that average mileage per car has fallen 13% since 1995.
New business models such as Mercedes Car2Go car sharing concept are clearly going to play an increasing role, particularly in cities. This is bad news for those who still rely on likely GDP growth as a guide to chemicals growth. Instead, companies are going to have to focus on better understanding trends on the demand side of the value chain.