INSIGHT: Near-term risks persist for US, global economies

01 December 2011 15:39  [Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS)--Economic growth among developed nations is facing serious headwinds, expansion in emerging economies is slowing and, despite some recent encouraging signs for the US economy, unemployment will remain painfully high through 2013 and the recovery remains at risk.

That is the sobering outlook from Janet Yellen, a top official at the US central bank, the Federal Reserve Board.

Yellen is vice chairman at the Fed, second only to board chairman Ben Bernanke.

In remarks this week to the Federal Reserve District Bank in San Francisco, California, Yellen warned that there is an urgent need for “strengthened international policy cooperation to attain strong, sustainable and balanced growth in the global economy”.

“The global economy is facing critical challenges,” she said.

“The recovery in the US and other advanced economies has been proceeding too slowly to provide jobs for millions of unemployed people,” she noted, adding: “There have also been clear signs of slowing growth in emerging market economies over the past year.

“In effect, we face a dearth of aggregate demand, not just among the advanced economies, but also for the global economy as a whole,” she said.

Yellen conceded that the US economy, for one, has shown some improvement of late, but warned that those modest gains may not be enough to trigger and sustain a real recovery.

US third-quarter GDP growth was recently downgraded by the Department of Commerce to 2% from an earlier estimate of 2.5%.

In addition, new orders for US durable goods fell in October, marking the fourth monthly decline in five months. And despite some recent economic gains, the Fed has lowered its outlook for the US economy.

“The pace of the economic recovery has been less vigorous than desired or expected, and the unemployment rate has declined only about one percentage point over the past two years,” Yellen said.

“Indeed, the number of jobs in the private sector remains more than six million below the peak level reached in early 2008 – a distressing development made all the worse by the fact that new entrants have, of course, continued to come into the labour force in recent years.”

US economic growth has improved marginally in the second half of this year, but only in comparison to the moribund expansion of the first half. It is not a rate of growth sufficient to make any significant inroads into US unemployment figures.

“The consensus of professional forecasters in the survey released earlier this month by the Federal Reserve Bank of Philadelphia was that unemployment would decline only slightly in the next few years, to an average rate of 8.4% in 2013,” Yellen noted.

That is not much of a gain, considering that US unemployment is now 9%. A reduction of slightly more than one half of a percentage point over the next two years is an improvement – but just barely.

Even that gain, said Yellen, is not certain. “Moreover,” she added, “financial market conditions have deteriorated, on net, in recent months, intensifying some of the headwinds facing the economy.”

Yellen also cautioned that the usual champions of earlier US post-recession recoveries – consumer spending and the housing sector – have not answered the bell this time.

“In the pre-crisis years, consumer spending grew rapidly, providing considerable impetus to the expansion,” she noted. “In contrast, over the next few years, consumer spending seems unlikely to serve as one of the main engines of growth.”

That is sobering news. Consumer spending is the principal driving force of the US economy, accounting for as much as 70% of the nation’s production and commerce.

And, while consumer spending has shown recent improvements, there is no certainty that those gains will continue past the US Christmas holiday period into the new year.

Nor has the housing industry been able to breathe life into the US recovery. Far from it. In a reversal of roles, the housing sector has lagged behind in this recession recovery.

“A sharp downturn in housing was at the core of the recession,” Yellen noted, “and this sector continues to weigh on the recovery.

“Robust increases in housing activity have helped spur recoveries from most US recessions since World War II,” she said.   

“This time, in contrast, residential construction remains depressed by a large inventory of foreclosed and distressed properties, ... tight credit conditions for construction loans and mortgages and concerns about the possibility of further declines in home prices.

“As a result, new home construction currently is at only about one-third of its average pace in recent decades,” Yellen said.

This persistent recession in the housing sector is of particular concern to the US chemical industry, because new home construction is – or was – a major downstream consuming sector for a broad range of chemicals, resins and derivatives.

In sum, said Yellen, “growth in advanced nations, including the US, faces serious headwinds”.

“Households are still deleveraging, corporations are reluctant to invest, and fiscal consolidation is needed over time to place public finances on a sustainable course,” she added.

“Despite some pick-up in growth in the US during the second half of the year, the outlook is for unemployment to diminish only slowly, remaining painfully high for many years to come,” Yellen predicted.

“These developments also have affected emerging market economies, where there are now clear signs of slowing growth,” she added.

“In addition, downside risks to global growth have increased significantly because of rising financial market pressures, reflecting an intensification of stress in European banking and the sovereign debt markets, as well as broader concerns about the outlook,” she concluded.

Markets worldwide were thirsting for a shot of confidence and they got it on Wednesday with a coordinated effort by the US Federal Reserve and the European Central Bank – along with central banks in the UK, Japan, Canada and Switzerland – to provide the eurozone with ample dollar-denominated liquidity.

The central banks cut the rate for borrowing dollars on existing credit lines by half a percentage point, giving a lifeline to European banks facing a credit crunch. Separately, China’s central bank lowered its reserve requirement ratio for commercial banks by 50 basis points, freeing up more capital for lending.

This is the boost of confidence needed to kick-start stagnant and declining markets permeated by the fear of financial catastrophe.

Stock markets shot up worldwide on Wednesday, with the chemical sector among the leaders. Shares in Germany’s BASF were up by 6.9%. Big share price gains were registered by US-based firms Dow Chemical (+7.5%), DuPont (+5.8%), Huntsman (+10.2%) and Celanese (+9.3%), as well as the Netherlands-based LyondellBasell (+7.6%). Shares in US-based TPC Group soared by 19.8%.

The spread of the eurozone debt crisis has hit economies worldwide. In the chemical sector, as elsewhere, buyers have largely taken down their orders to an as-needed basis, fearful of a collapse in demand similar to the one the sector faced in the fourth quarter of 2008 in the throes of the global financial crisis.

Fears of a double-dip recession have also hit the high-yield financing market, resulting in less available credit for mergers and acquisitions (M&A). Deal activity has slowed considerably – after all, who wants to buy large assets in such an uncertain economic environment?

While the latest government monetary-easing moves go a long way towards alleviating short-term liquidity issues, they do not address the structural problems of debt overload and stagnant growth. More needs to be done to lower debt to sustainable levels.

China’s move could have a big impact on the ethylene market, said Vincent Andrews, analyst at US-based investment bank Morgan Stanley. “With a loosening of Chinese monetary policy, our base case thesis that inventories stabilise at low levels (around 20 days) now looks conservative, and our bull case appears more likely,” he said. He expects China inventory destocking to end by the first half of 2012, and demand to drive global ethylene operating rates to 90% by 2014.

Joseph Chang contributed to this article

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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