When the economy is running well, most people tend to get on with their lives. That was the case during the 1982-2007 SuperCycle, when growth was almost constant. But today's greater economic uncertainties translate into a growing role for Political and Social factors, as the triangle above describes:
• In the West, politics is becoming much more important. What will happen over the 'fiscal cliff' in the US, or the Eurozone? Nobody knows, but the decisions will not be made on solely economic factors
• The Middle East has some of the youngest populations in the world. This social factor is a key driver for the Arab Spring, as young people go on the streets to demand jobs
• In China, economics has never been the main factor. The Communist Party has instead carefully balanced social and political factors since Deng's 1992 Southern tour, and the new leadership will continue this policy
This makes forecasting a lot more difficult. No longer can companies simply decide that polyethylene demand, for example, will be 1x or 1.2x GDP, and then simply use a GDP forecast from the IMF to finalise a forecast. As fellow-blogger John Richardson notes, the removal of economics as the key driver is the equivalent of removing the suspension from a car.
Not only will the journey become much more bumpy, but the end-result will be much more uncertain. As the IMF themselves now warn:
"There is a 1 in 6 chance of global growth falling below 2%, which would be consistent with a recession in advanced economies and low growth in emerging market and developing economies. Ultimately, however, the forecast rests on critical policy action in the euro area and the United States, and it is very difficult to estimate the probability that this action will occur."
The chart shows benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments below:
HDPE USA export, purple, down 20%. "Producers were unwilling to lower prices to make material more competitive with global pricing"
PTA China, red, down 18%. "The spread between PTA spot prices and PX costs narrowed to below $60/tonne since early October, which is too low to cover variable costs of $120-150/tonne for most PTA producers"
Naphtha Europe, brown, down 15%. "Oversupply now building in the European naphtha market"
Brent crude oil, blue, down 13%
Benzene NWE, green, up 2%. "Tighter availability of feedstock pyrolysis gasoline (pygas)."
S&P 500 stock market index, pink, up 1%