Policymakers turn more downbeat

There has been a noted change of tone from leading policymakers in the past few days. Gone is the jaunty confidence that the world economy is ‘fundamentally sound’. This has been replaced by a sense that debt market problems may have a wider impact than first expected.

US Treasury Secretary, Hank Paulson, typified the new tone when warning this week that the US subprime problem will ‘continue to adversely impact our economy, our capital markets, and many homeowners for some time yet’. His downbeat assessment was all the more remarkable as it followed his success over the weekend in establishing a $75bn ‘superfund’ to help support the asset-backed commercial paper market.

Instead of spinning this fund as the answer to recent problems, Paulson seemed to be going out of his way to reduce expectations about a quick recovery. This also seems to be the approach being taken by the IMF, which has cut its forecast for world growth and warned that the US$ may still fall further.

The IMF is still forecasting a relatively strong year in 2008, with 4.75% GDP growth compared to 5.2% this year. But it commented that ‘the risks to the outlook look firmly on the downside, centring around the concern that financial market strains could continue and trigger a more pronounced global slowdown’.

Equally, its comment that ‘the weakening dollar was part of a normal process of economic rebalancing’ is likely to raise concerns in parts of Europe, and Asia, that the US is quietly pursuing a policy of ‘beggar my neighbour’ via currency devaluation.

The new note of realism by policymakers is very welcome if it leads them to debate robust solutions to the present crisis. But if frankness merely leads to argument, as we saw most notably in 1987, then those finalising the 2008 budget process in chemical companies may need to anticipate more turbulent times ahead.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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