Coming To Terms With Global Deflation

Business, China, Company Strategy, Economics, Oil & Gas, Polyolefins

By John Richardson

ChinaproducerpriceiindexSept2014YOU used to be able to take, say, a World Bank report on GDP growth forecasts, plug that into your spread sheet, look at low per capita consumption of chemicals and polymers in the developing world and your job used to be pretty much done.

As a researcher working for any chemicals company, who had to come up with a forecast for her or his boss, this was usually good enough in the “Old Normal”.

So what if you were right for  the wrong reasons – i.e. it was debt that fuelled China’s growth in 2008-2013 rather than the rise of its fabled “middle class”? This didn’t matter at all because growth was still pretty much always in line with your expectations as growth was always wonderful – double digit, in fact, year after year.

Why rock the boat, also? Where was the incentive to challenge “group thinking” when even your CEO was talking the same language – that this time was, really, honestly, different, that this time a country such as China could defy economic history? Constant urbanisation and the rise of its “middle class” were the slogans being spoken by just about every CEO as guaranteeing a constant sunny upland of endless growth that benefited everyone.

And why devote any mental energy whatsoever to worrying about the impact on the West of the retirement of the Babyboomers? Surely, if your CEO didn’t see this is a problem, why get stressed out about something that wasn’t even on the radar screen of one of your “betters”?

Similarly, you didn’t hear, at least in public, barely a whisper of concern from  most politicians and central bankers about China’s economic fault lines or the secular decline of the West. Instead, just about all the policy focus, all the debate, was about how it was merely necessary to throw enough economic stimulus at the problems and the problems would go away.

Sitting in the research department of a chemicals company, the very idea of putting your head above the parapet might well have felt like not only career suicide, but also extraordinarily arrogant. What did you have to contribute of any value when, as I said, all your “betters’ kept telling you that everything was fine?

And further, of course, if anyone has had any “skin in the game” of financial and commodity markets the last five years have been tremendous. The S&P 500 has soared  in value and if you sell chemicals and polymers to China, you are likely to have done extremely well. Take polyethylene and 2009 as examples. China’s apparent demand growth grew by more than 25% during that year.  What on earth was the point, to use another cliché, of looking this gift horse in the mouth?

Now, as  the Great Unwinding begins, there are many people who think that this is just a bad quarter – and that everything will be, more or less, back to normal in Q1 next year, or at the very worst, by the second quarter of 2014.

It would be fantastic if they are right, but I really, sincerely, think that they are harmfully wrong for one overriding reason: We have entered an extended period of global deflation.

This is why, from tomorrow, I will run a series of posts on deflation.

The first post will look at China and the deflationary impact it has long been exerting on the global economy – and why this, today, matters much more than 12 months ago.

I will also look at oil and gas. We are entering an era of abundant energy, which, will, of course, contribute to global deflation.

And I will also devote posts to the deflationary impact on Europe and the US.

But just telling people, “it is going to be awful,” is not, obviously, by itself, good enough.

So, as I explore this key theme over the coming weeks, I will make some suggestions about what can be done in response to deflation. As always, there will be opportunities as well as challenges.

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