INSIGHT: Market sentiment driving the economy

05 February 2008 17:11  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The big question at the start of 2008 is whether the global economy is heading for a slowdown or a slump.

The International Monetary Fund (IMF) last week cut its projection for global economic growth to 4.1% for 2008, down from the 4.4% it posited in October last year - a number seen at the time as probably over-optimistic - and the growth of 4.9% expected for 2007. Projections for the advanced economies were reduced significantly.

The momentum for growth has slowed on a fourth-quarter to fourth-quarter basis and the IMF says now that it expects US economic growth of only 0.8% compared with 2.6% over the same period in 2007.

Indicators have shown weakness in US manufacturing and housing, employment and construction.

For the euro area, on the same basis, the growth projection has been lowered to 1.3% compared with 2.3% during 2007.

Perhaps the most telling remark from the fund on 29 January, however, was that it believes that more significant spillovers into emerging and developing market economies might be expected from the ongoing turmoil in the financial markets.

Emerging market economies that are heavily dependent on capital inflows could be particularly affected.

So as the US catches its cold the rest of the world cannot remain immune. The fact that business understands this is reflected in the deterioration in business confidence indicators in Europe and Japan.

Publicly many industry executives remain upbeat. There are growing concerns, however, that the slowdown could hit hard.

For chemicals producers, the degree to which growth in the US economy and the industrial powerhouse that is China is affected is critical.

China needs to import chemicals and will continue to do so for years. In this slowdown, the extent to which China’s chemicals demand growth is linked to exports of consumer goods to the US and elsewhere will be exposed.

But another question currently for chemicals makers currently is what is real and what is not.

Facts are better than mood, one senior European chemical industry executive stressed this week. Current sentiment is driven more by mood than by hard data, he said.

Industrialists in manufacturing sectors like chemicals find it hard to see the impact of the sharp US slowdown in Asia - or yet in Europe for that matter.

Asia, particularly, has considerable industrial momentum of its own. And, importantly, there is growth.

The IMF projection is still for 4.1% global growth from the fourth quarter 2007 to the same period in 2008.

China’s GDP growth is projected to decelerate to 10% from 11.45% in 2008 on an annual basis. That slowdown may be a good thing in that it helps the world’s fastest growing industrial powerhouse to avoid overheating.

The real question is how chemical producers might fare in a slower growth environment.

So many say they have put their businesses in order over the past few years: they have restructured, driven costs down, cut debt and moved into preferred product markets.

The importance of those choices and actions will be exposed this year and next.

It is difficult to look too far ahead into 2008 and fair to say that this will be a year of uncertainty. Financial turmoil continues to have a deep global impact.

But how, and indeed, when, that impact is felt in the chemical industry remains to be seen.

By: Nigel Davis
+44 20 8652 3214

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