Could this be Germany's year?

08 January 2007 00:00  [Source: ICB]

After a strong performance in 2006, the European chemicals sector is expected to see a modest slowdown in growth this year, according to the economics team at the European chemicals industry council Cefic. It is expecting chemicals output to have grown by 2.5% last year, "clearly above the average growth rate over the last five years", and well above the 1.5% achieved in 2005 (figures exclude the fast-growing pharmaceuticals sector).

For 2007, the expectation is for a further advance of 2.2%, with petrochemicals, at 3.6%, and consumer chemicals, at 2.7%, leading the way. Fine chemicals and basic inorganics, however, will see growth moderate, from 2.8% to 1.7% and from 3.5% to 1.8%, respectively.

However, the overall performance, says Cefic, can still be described as robust.

WHAT DRIVES GROWTH?

Growth last year and for 2007 is driven by two factors: a positive demand trend in the domestic European market, as overall economic growth strengthens, and improved business with the EU's major trade partners. Domestic sales of chemicals increased by 4.6% in Europe last year, as a result, says Cefic, of "the favourable business climate in most of our customer industries." It sees this continuing, given the optimistic expectations of these industry sectors (see chart).

In particular, it picks out business confidence in the food and beverage sector, which has increased sharply and reached an all-time high in December. Other industries with high business confidence for the year ahead are machinery and equipment, basic metals and pulp and paper, all major consumers of chemicals.

On exports, it notes that these grew faster than imports during the past year, resulting in an encouraging trade surplus. Taking the first eight months of last year, chemical exports from the EU were growing at 1 percentage point faster than imports, compared with the same period a year earlier, with trade with the NAFTA region contributing especially strongly. However, warns Cefic, with the slowdown in the US economy now evident (see page 28) this will be subject to change in the near future. In the trade balance with Asia, Latin America and the Middle East, only minor changes are taking place.

The increase in the trade surplus during 2006 was spread almost equally over the subsectors of the chemical industry. Figures suggest that by the end of last year, the extra-EU chemicals trade balance stood at €41.2bn ($54.5bn), up from €38.1bn the year earlier.

ECONOMIC DIP

The expected modest decline in chemical growth for 2007 mirrors that of the EU as a whole. GDP growth in 2006 is estimated to be 2.7% and is expected to fall back to 1.9% for this year, before rebounding to 2.2% in 2008. This slowdown, say analysts at Dresdner Kleinwort, comes on the back of policy tightening in Europe and the global downturn. However, it argues that "with the corporate sector in fundamentally good shape and a still substantial monetary overhang likely to support overall domestic demand, a soft landing is in the offing."

Of the major EU economies, the UK has been one of the stronger performers in GDP terms in recent years, achieving growth of 2.6% in 2006. But last year saw German GDP rise strongly from 1.1% growth in 2005 to 2.6%, its best performance for the best part of 15 years. This has engendered a feeling of optimism in German manufacturing. Indeed, Germany's Ifo institute reported in the middle of December that German businesses are more confident about their prospects than at any time since 1991.

"The German economy is experiencing a very strong economic boom, as last observed in 1990, Ifo said in a statement. The German trade surplus is at an all-time high and unemployment rates are at a four-year low. Given the strong position, Ifo argues that the rise in Germany's value-added tax (VAT) will not have a major impact on the economy. However, GDP growth is still forecast by Dresdner to slip to 1.5% for the year, to recover to 1.9% in 2008, in line with the fall off for the EU as a whole.

By: John Baker
+44 20 8652 3214

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