INSIGHT: The external shocks that challenge growth

22 March 2011 17:08  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--No-one expected global economic recovery to progress smoothly. The extent of the financial meltdown and the depth of the economic crisis saw to that.

Fiscal stimulus and the political response introduced a degree of stability, notwithstanding China’s overheating economy and the eurozone debt crisis. But previously unforeseen events could yet stifle growth and help further lift inflation.

It is too early to tell, but assessments are being made of the economic impact of the Japan earthquake, tsunami and nuclear crisis.

Military action in Libya has focused attention on oil availability and real market tightness, although there is a suggestion that OPEC quotas have been abandoned. The question remains as to whether political unrest can spread further in the Middle East and North Africa, hitting other oil producing nations.

Large external shocks to the economy are always to be expected and most forecasts are couched in terms that accept them. Nevertheless, before recent events confidence in economic recovery and growth was increasing.

Middle East tensions might have been expected. Japan’s triple disasters were not.

The oil price has eased higher following the slump last week, driven by the uncertainty surrounding the terrible events in Japan. But as ICIS reported on Tuesday, the futures markets have factored in an increase in oil demand from Japan to compensate for the loss of nuclear power and for reconstruction.

The imposition of a ‘no-fly’ zone over Libya is likely to keep oil supplies disrupted for longer, Commerzbank said in a research note. It expects oil prices to remain above $100/bbl until at least the middle of this year.

That price level could be maintained for longer if oil demand from Japan rises significantly - the bank reckons that Japan’s demand for oil will rise by 20% because nuclear power generating capacity will be either temporarily or permanently shut down.

It is particularly difficult to assess the impact of the Japan disasters on the global economy. Japan has struggled to grow for years and is burdened by debt and an ageing workforce. But its people can be expected to respond to the current crisis with great determination and application.

The impact of the disasters on Japan’s important automobile and electronics industries is proving to be significant, having knock-on effects around the world. There is growing concern about the continued availability of printed circuit boards and silicon chips because of raw material, infrastructure and logistics problems. Japan’s automakers have shut down - as have some of their subsidiaries overseas.

Many automakers in Japan are facing serious supply disruptions, not only damage to their plants, but also problems such as rolling blackouts, infrastructure damage, port and shipping issues, the economics research firm IHS Global Insight said on Monday.

“The initial estimates are that this could be a protracted shutdown of the Japanese industry as well, as it is not just simply a matter of repairing plants, but of repairing infrastructure, regional power-generation ability, and even replacing workers from communities that have lost thousands upon thousands of people to the disaster and resulting in displacement,” it added.

IHS economists and others are trying to assess the impact on these sectors globally and the supply chains of which they are an integral part.

The disruptions are likely to depress global growth at a time when it is sorely needed but the rebuilding could see the situation, in part, reversed.

“How much will consumers in key economies be squeezed by rising fuel prices and shortages resulting from supply chain disruptions?” IHS asks (its economists want to make an attempt to provide some of the answers later this week). “What will be the impact on inflation, especially in the emerging world? How will policymakers react to both [Japan and Libya/the Middle East] events?”

Chemical producers benefitted greatly last year from a global resurgence in manufacturing activity. The latest ‘Chemical Outlook’ newsletter from Probe Economics in the US notes that manufacturing has continued to do well with the Global Purchasing Managers’ Index rising in February to the “expansionary” 57.8 level.

That measure and the high oil price that is buoying upstream prices accounts for the positive business mood prevalent in the sector.

But still higher oil and difficult, but hopefully only temporary, physical market disruptions do not augur well for the near-term future. The high oil price, particularly, could put a further dampener on growth which was expected to slow this year across most of the petrochemical business.

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By: Nigel Davis
+44 20 8652 3214

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