INSIGHT: 'New normal’ challenges chem firms to think differently

06 September 2011 18:11  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Economic recoveries since 2001 have proved to be surprisingly weak despite unprecedented levels of stimulus. And the current faltering recovery is one of the longest seen in modern times.

This is because we are coming to the end of a long cycle driven by the baby-boomer generation, International e-Chem chairman Paul Hodges and my colleague John Richardson have been explaining on the ICIS website and in ICIS Chemical Business (ICB) magazine since the end of May.

The demographic trend has been ignored by policymakers and investors, they suggest, arguing that the “time bomb” caused by the ageing of the baby boomers, those born between 1946 and 1970, lies behind our current economic malaise.

“Since 2001, the boomers have been entering the 55-plus age range, when people typically spend less and save more,” Hodges says in a letter published in Britain’s Financial Times on Tuesday. “They were the richest, and largest, generation that the world has ever seen,” he notes.

“By 2020, an unprecedented 33% of the developed world population will be more than 55 years old. We cannot move forward, therefore, in terms of stimulating demand, until we recognise that there is no way back. Equally, though, we could then open our eyes to the opportunities that will exist in this ‘new normal’.”

Manufacturing companies are struggling to find growth and the real concern is that they will continue to do so in a lacklustre economic environment in which the threats of double-dip recession and stagflation are writ large.

Industry and electorates are seeking some direction and see none. Policymakers flounder as the enormity of the financial and economic crises appears to overwhelm them, and the markets react.

Developed countries saw an economic supercycle develop between 1970 and 2000, as the baby boomers reached peak levels of productivity and spending power. By 2000, there were 384m in the 25-54 age range, 41% more than in 1970.

“They created a truly golden age for housing, auto sales and overall consumer demand. Manufacturers were forced to invent the concept of ‘outsourcing’, as they struggled to keep up.”

The problem is that policymakers became used to these levels of pent-up demand.

“Any increase in interest and mortgage rates meant boomers had to postpone purchases. But the kids were still growing and more boomers kept entering the 25-54 age group. So demand then returned with a rush when rates were reduced again.”

There can be little surprise, then, that at the end of this demographic cycle economies struggle to grow.

Japan appears to have passed the baby-boomer peak some 10 years ago and its economy has been in the doldrums since. Western policymakers may have dismissed successive attempts by Japan’s leaders to tackle painfully low growth, suggesting that “it could never happen here”, but are being proved wrong.

The challenging aspects of the new normal are that no one size will fit all and that a robust scenario approach to planning is needed alongside a healthy dose of creative thinking.

“Our research for the eBook shows that the transition to the New Normal will require a complete change in approach for many companies,” Hodges and Richardson say.

But they add that there are plenty of new ideas (such as the concept of global “megatrends”) that can power the next wave of global growth.

But the threats are clear, too. “Doing nothing is not a solution,” the authors add in a recent issue of ICB. “It will mean we miss the opportunity to create a new wave of global growth from the megatrends.”

Second-half 2011 demand growth is proving hard to find and companies have already begun to downgrade their expectations for the year.

The first half was stronger than expected, certainly, but there were signs at the end of the second quarter, upstream in petrochemicals and in consumer-oriented chemicals markets such as coatings, that times were about to get harder again.

How hard, remains to be seen, and there are those who believe in a temporary correction in the financial markets. But demand scenarios such as those suggested by the new-normal analysis point to a more difficult medium- and longer-term economic and industrial environment.

Having laid out the challenges, the authors of the e-book Boom, Gloom and the New Normal – How Western Baby Boomers are changing Global Chemical Demand Patterns, again are using successive chapters to look at the opportunities that might exist for chemicals producers in different demand environments. These range from targeting products at an increasingly active older population in the developed economies to tackling the problems of growth in emerging markets.

There are opportunities to be had but also changes that companies must make if they expect to flourish in the new normal.

 Hodges calls this a question of “mind-set”.

“Successful companies will be those prepared to venture into the unknown,” he says. Who would have thought until recently, for example, of the 55-plus generation as a separate economic unit? Who would have envisaged the implications of the new normal?

Read Paul Hodges’ Chemicals & the Economy blog and John Richardson & Malini Hariharan’s Asian Chemical Connections blog


By: Nigel Davis
+44 20 8652 3214



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