2012 sees rising political risk, and protectionism

Deflation.pngThe world enjoyed an economic SuperCycle between 1982-2007. Its largest economy, the USA, suffered just 16 months of recession during the whole 25 years.

As a result, social and political issues took a back-seat. Politicians instead competed to occupy the middle ground. Former UK premier Margaret Thatcher’s phrase ‘you can’t buck the markets’, became received wisdom almost everywhere.

The blog suspects a major change is now underway, as the world enters another recession – just 3 years after the 18 month downturn between 2007-09. Politics may revert to discussion of policies, instead of image. And life may become more uncertain as a result.

2012 sees presidential elections scheduled in the USA, China, Russia and France:

USA. The first primaries are now underway
China’s elections will see only 2 of the current 9-member politburo remain – Xi Jinping and Li Keqiang
Russia’s election process seems more uncertain, after recent protests
France’s election could be quite turbulent, given the Eurozone crisis

In addition, Germany will be preparing for major elections in 2013, whilst India’s current government may not last until 2014′s elections. Italy also seems overdue for an election, following Berlusconi’s departure.

Political issues will therefore assume much greater importance. A year ago, in its Budgeting for Uncertainty White Paper, the blog suggested that:

“Rising Western unemployment does not help the domestic population to repay the debts incurred during the final stage of the Boom after 2002.

And if it can’t repay its debts, then it won’t repay them. This will have consequences for the people who lent the money – particularly those Asian countries, such as China, who operated mercantilist policies under which they lent money to the West, in order to sell them the goods needed to keep their factories employed.

“In fact, as the chart above from Comstock Partners illustrates, we are now getting towards the really difficult part of the Cycle:

• It began with Asia boosting savings and investment in chemical and other plants as part of its export-led development model
• Whilst the West created overcapacity in financial services, as it recycled the vast Asian savings pool into Western debt instruments that would enable consumers to buy all the goods being produced.
• But in the end, of course, growing overcapacity then led to a loss of pricing power. In turn, this led to the Crisis of 2008.

“Now we have moved into a new stage, where countries try to maximise domestic employment by boosting exports via devaluation of their currencies.”During 2011, we moved into a phase of competitive devaluations. Today, trade disputes are becoming much more common:

Whirlpool, the world’s largest appliance manufacturer, is asking for dumping duties on Korean refrigerators from Samsung and LG
• Meanwhile, the EU’s new airline tax on carbon emissions is threatening a trade war with China, Russia, India and possibly the USA.

2102 may well be the year when politicians more openly adopt protectionist measures to improve their own chances of election or re-election.

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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