15 October 2012 12:30 [Source: ICIS news]
PERTH (ICIS)--As chemicals companies carry out budget planning for 2013, it is hard to think of any macro-economic certainties.
“Economic or financial variables are at levels unique to this cycle, even if we extend the analysis back hundreds of years. This must surely reduce the confidence levels in predicting the future to fairly low levels,” wrote Deutsche Bank in a report on the global economy, Journey into the Unknown, which was released last month.
The bank argued that the quickest and surest way back to economic health was for western economies to restructure their debts. Five years into the crisis, unhealthy relationships between debt and GDP in Europe remained largely in place because of an unwillingness to bite the debt write-off bullet, the report said.
But the bank warned that; “the reality is that the short-term pain of such an outcome would not be tolerable to politicians and most modern day central bankers.
“Therefore the most likely scenario is that money printing is here to stay across the globe until it eventually works and restores stability, or it creates its own problems further down the line.
“There is a precedent for individual countries expanding their central bank balance sheets this high before, but not for so many countries acting simultaneously in such a manner.
“Eventually we think inflation will win out as we haven’t seen a year of global deflation since 1933. The twentieth century has been all about loosening ties with gold, thus allowing for varying degrees of money creation and the dramatically reduced risk of deflation. “
But then the bank conceded that deflation was also a possibility in 2013 and beyond, along with hyperinflation and debt defaults.
“We are more reliant on politicians and central bankers to manipulate and shape markets and returns than perhaps ever before,” said the report.
Deutsche Bank added that we were, as a result, no longer living in a world of free markets.
The increased role of politicians and central bankers adds significance to last week’s announcement by the International Monetary Fund (IMF).
In 2010, the IMF calculated that “fiscal consolidation typically lowers growth in the short term. We find that after two years, a budget deficit cut of 1% GDP tends to lower output by about 0.5% and raises the unemployment rate by a one-third percentage point.”
But at its annual meeting in Tokyo last week, and in its latest Global Financial Stability Report, the fund conceded that it had underestimated the impact of austerity.
“Our results indicate that multipliers have actually been in the 0.9 to 1.7 range since the Great Recession,” said the IMF.
The fund now wants Greek debts written off and more time given to other European countries to settle their loans.
Christine Lagarde, the IMF’s managing director, was also quoted as saying in Tokyo that countries should not blindly stick to deficit targets if growth weakens by more than had been forecast.
She talked of how “automatic stabilisers” should be used if growth fell short, such as increases in welfare and tax cuts.
This could be excellent news because austerity has had a severe impact on European chemical and polymer end-use demand.
Spain’s car registrations, for example, plunged by 37% in September, with the year as a whole 11% lower, according to ANFAC (Asociacion Espanola de Fabricantes de Automoviles y Camiones).
European polyethylene (PE) demand is forecast to have fallen by as much as 7-8% in 2012 over last year, according to one converter.
A problem, though, is that Germany is at loggerheads with the new IMF view, said commentators.
German politicians would find it very difficult, perhaps impossible, to sell greater debt leniency to the German public. Underpinning many of the tensions within Germany are historic fears over hyperinflation.
The IMF announcement might therefore leave us marooned on Square One: A European economy where growth is depressed with the outlook very uncertain.
China is adding to the confusion.
“Strong China growth hasn’t prevented the developed world from spiralling into economic chaos in recent years so China is unlikely to be able to single-handedly come to the rescue. In fact, what would happen if China’s growth actually slowed dramatically at some point?” added Deutsche Bank in the same report.
This dramatic slowdown could already be taking place because of deep structural problems with China’s economy, according to some forecasts. For instance, the country’s nominal, or real, GDP growth might be as low as 4-5% in 2013-2016, warned a hedge fund in a report released last month.
The China-Japan dispute over the East China Sea Islands adds further complexity to the China outlook, and once again underlines the Deutsche Bank point about the increasing role of politicians in determining overall growth outcomes, as well as how specific markets behave.
Japanese car sales in China have registered steep falls as a result of the dispute over ownership of the islands. Toyota, for example, reported that its September 2012 year-on-year sales were down by 49%, with Mitsubishi saying its sales declined by 63%.
Chemicals industry executives are worried that the disagreement could escalate into a trade war, and possibly, even, a military conflict.
Other variables including the looming US fiscal cliff, which could very easily push the world’s biggest economy back into recession.
The planning process is, ironically, perhaps even harder than it was in late 2008, when just about everyone wrongly thought that the world had come to an end.
Read John Richardson and Malini Hariharan's Asian Chemical Connections blog
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