INSIGHT: OECD warns but gives encouragement

26 May 2010 17:38  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The financial markets were down sharply this week on investor concerns about the euro. The disquiet spilled over to commodities. The recovery, on which so much store had been set, looked shaky to say the least.

A consultant colleague of mine could hardly bring himself to suggest that this could be the start of “the big ‘W’ recession”. And yet.

The dreaded double-dip recession may be upon us, wrought in the inability of some states to effectively manage almost unimaginable burdens of debt as others try to deal with runaway, but unsustainable, growth.

“Volatile sovereign debt markets and overheating in emerging-market economies are presenting increasing risks to the recovery,” the OECD warned on Wednesday.

Bolder measures need to be taken “to ensure fiscal discipline”, the OECD added. But it had some praise for what is being done

“This is a critical time for the world economy,” said OECD secretary-general Angel Gurría in a statement.

“Coordinated international efforts prevented the recession from becoming more severe but we continue to face huge challenges. Many OECD countries need to reconcile support to a still-fragile recovery with the need to move to a more sustainable fiscal path. We also need to take into account the international spillovers of domestic policies. Now more than ever, we need to maintain cooperation at an international level,” he added.

The organisation ruled out a double-dip recession in Europe, given the weakness of the euro and despite the possible impact of the action being taken to tackle the sovereign debt crisis.

Growing satisfaction, first with financial market growth and subsequently with physical trade, had spread a warming glow.

In chemicals, commodities were looking healthier. Even specialties were benefiting from significantly improved volume demand compared with the pitiful levels of early 2009, despite higher upstream chemical feedstock costs.

The table below shows the gains made in regional chemicals production over the past few months. The data are for all chemicals, including pharmaceuticals, and represent the percentage increase on a three-month moving average basis.

If you are a maker of commodity petrochemicals or polymers, then output growth will probably have been stronger than the data suggest. In the first quarter reporting season, many companies talked about a much-improved March compared with January and February, with the upswing continuing into April.

Global chemicals production growth in 2010 

Country/Region

January

February

March

April

Western Europe

6.1

8.3

9.6

10.8

US

6.6

7.4

6.7

5.6

Latin America

4.4

10.2

14.2

14.2

Asia Pacific

14.7

17.1

16.4

14.2

China

21.4

23.1

22.5

-

India

18.3

14.4

7.8

-

Japan

0.4

4.9

9.0

-

Africa & Middle East

4.6

6.8

9.1

10.1

Central & Eastern Europe

13.4

18.2

20.4

19.6

Source: American Chemistry Council


The OECD's economic forecasts have been revised upward since November 2009. OECD economic activity has picked up faster than expected and is now forecast to rise by 2.7% this year and by 2.7% in 2011. The previous forecasts were for growth of 1.9% and 2.5% respectively.

But it is in the regional differences that the fault lines in the global economy are apparent.

Europe is, and is likely to continue to be, the “sick man” of the world. Growth in the eurozone is forecast at 1.2% this year and 1.8% next, the OECD says. Japan’s output could expand by 3.0% this year and 2.0% in 2011, it suggests.

The US economy is forecast to expand by 3.2% in 2010 and 3.2% again in 2011, the OECD says.

When adding the eurozone  and wider  debt insecurity to the very clear risks of overheating in emerging market economies, you have a potentially toxic brew.

“A boom-bust scenario cannot be ruled out, requiring a further tightening in countries such as China and India,” the OECD says. “The knock-on effect would be slower growth in other regions.”

That is (part) of the downside.

However, get it right and the opportunities are significant. Structural reform and exchange-rate realignment in most regions of the world could add between two and three percentage points to the OECD baseline global growth scenario.

Bookmark Paul Hodges’ Chemicals and the Economy blog
Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog
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By: Nigel Davis
+44 20 8652 3214



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