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New scenarios for 2022 Eurozone and UK PE growth as inflation and debt pressures build

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By John Richardson on 09-May-2022

By John Richardson

CHOCOLATE BISCUITS produced by a famous brand owner were on offer in a UK supermarket at two packets for the price of one a few weeks ago, but they weren’t selling in the volumes that had been expected.

Instead, lower-paid customers (the supermarket has data on income levels through answers to questionnaires filled-in to obtain loyalty cards) were preferring to buy single packets of white label, or supermarket supermarket-owned- brand, biscuits that were cheaper than taking up the “two for one” offer.

This doesn’t appear to be down to greater health consciousness, as, during the height of the pandemic, “two for one” offers for confectionary in general were selling extremely well.

This is obviously just one anecdote, from one of my old friends who managers a supermarket in the UK’s Midlands region.

But the New York Times wrote in this article: “Overall inflation in Britain is expected to hit a peak of 9% later this year. According to figures released by the government on Friday [29 April], over 90% of adults said their cost of living had increased over a two-week period in April, largely because of food and energy bills.”

April had been an especially tough month because of the government raising its cap on energy prices by 54% that affected 22m households, the newspaper added. The cap, which was reset twice a year, was expected to increase again in October, said the NYT.

The latest UK-wide supermarket sales data from NielsenIQ showed total sales at UK supermarkets fell by 1.8% over the four weeks ending 23 April. But spending was still higher compared with the same weeks in the pre-pandemic year of 2019.

The cost-of-living crisis is a Europe-wide phenomenon, as is the risk that support for food-packaging demand declines as we, hopefully, continue to move into an endemic phase of coronavirus.

On this latter subject, consider the chart below showing the long-term historic relationship between GDP growth and polyethylene (PE) demand growth in the Eurozone plus the UK.

In 2020, Eurozone and UK PE consumption (across the three grades) fell by 3% as GDP contracted by 7%.

But if we look back to the Global Financial Crisis, PE demand fared far worse relative to GDP. In 2008, as the crisis began, GDP growth was flat, but PE demand fell by 5%. In 2009, as the crisis intensified, GDP growth fell by 5%, corresponding with a record-high 9% shrinkage of PE demand.

Last year, as reference, GDP growth rebounded to 6% growth and PE demand increased by 2%.

The UK supermarket manager’s discovery in mid-2020, that sales of confectionary to his lower-paid customers had gone up relative to before the pandemic, underlined headline retail sales data that showed the positive impact of major government spending.

Developed-world stimulus was mainly targeted at the lower-paid through job -furlough schemes and direct money transfers. Studies showed that lower-wage earners were better off at the height of the pandemic than before it began.

Further support to rich-world demand – and remember, the blog was among the first publications to identify this to support your demand planning – was the rise in “surface area” demand across all income groups, as eating in supermarkets greatly increased versus dining out.

When individuals buy food from supermarkets it is obviously in smaller amounts than bulk buying by restaurants. The resulting smaller package sizes mean more lids, more corners and therefore more tonnes of PE required than before the pandemic.

Also think of the PE used to package faces masks, other personal protective equipment and syringes (these are made from polypropylene) when the pandemic was in its worst phase.

All the above helps to explain why Eurozone and UK demand only fell by 3% in 2020 as GDP declined by 67%.7%

But now:

  • Peak pandemic economic stimulus is being wound- back by Western governments as the cost of living, quite literally, goes through the roof.
  • Far more restaurants are open and dining out has picked up. But one wonders how long this will last because of the cost of living. So, perhaps, a return to buying food in supermarkets will provide further “surface area” support to PE consumption.
  • But if we do continue to move into an endemic phase of coronavirus, there will be less PE demand for packaging face masks and other personal protective equipment.

How much flexibility will Western governments have to launch further economic stimulus to support the lower-paid? To what extent will “two for one” offers for brand owner-made chocolate biscuits become more affordable?

I see the answers to these questions as being crucial for determining Eurozone and UK PE demand during the rest of this year, and the extent to which consumption will have grown throughout 2022

Given the likelihood that Eurozone and UK PE production is likely to decline on reduced purchases of Russian oil, naphtha and natural gas, this will in turn determine the extent to which the region will need to import PE to close the production gap.

Government support may be limited by inflation and debt

Can Western governments afford to provide new stimulus on a scale that can support PE demand, given rising interest rates and the potential for further increases in food and energy costs?

Olivier Blanchard, former chief economist of the IMF, and Jean Pisani-Ferry believe that despite the increasing costs of borrowing, cash transfers to the lower-paid in the EU need not exceed half a percentage point of EU GDP. But this is based on oil and gas costs only increasing by 25% from their pre-crisis levels.

The EU plans to reduce dependence on Russian gas by two-thirds by the end of 2022, which has led to a steep spike in LNG prices.

There is a risk that Russia reduces natural gas flows to other European countries following its halting of supplies to Bulgaria and Poland. Important energy infrastructure could also be damaged during the conflict.

This points to the risk of oil and gas costs increasing by more than the 25% forecast made by the economists in their research paper.

Western central banks seem to be so far behind the inflation curve that very aggressive interest rate hikes s may be necessary, hampering the ability of the EU and UK governments to cushion the blow from higher food and well as higher energy costs.

The build -up of private and public debt since the Global Financial Crisis, which will become much harder to service as interest rates continue to rise, may could also limit stimulus.

“During the pandemic deficits increased and debt accumulated much faster than they did in the early years of other recessions, including the largest: the Great Depression and the Global Financial Crisis. The scale is comparable only to the two 20th century world wars,” wrote the IMF in this blog.

“According to the IMF’s Global Debt Database, borrowing jumped by 28 percentage points to 256% of GDP in 2020,” continued the blog.

“Governments accounted for about half of this increase, with the remainder from non-financial corporations and households. Public debt now represents close to 40% of the global total, the most in almost six decades,” the IMF added.

The IMF said that the developed world plus China had led the rise in global debts. A subject for another day is how the developing world also faces a potential debt crisis.

Scenarios for Eurozone and UK PE demand in 2022

As usual, therefore, let me provide with you some scenarios for PE demand, based on this earlier analysis.

The ICIS Supply & Demand Base Case growth for Eurozone and UK PE demand in 2022 over last year is 1%.

I see this outcome as likely if the Eurozone and the UK can offset rocketing inflation through significant support for lower-paid workers. This will largely counteract the loss of tonnes resulting from the endemic phase of coronavirus.

Downside 1 envisages limited wiggle room for extra fiscal spending on rising interest rates and further upward pressures on inflation. Here, consumption contracts by 4%.

The worst-case outcome, Downside 2, would see demand falling by 7% on full-blown stagflation and a debt crisis as much- higher interest rates make debt costs unserviceable. The worst-case outcome leaves demand around 900,000 tonnes lower than 2021 and a million tonnes lower than our Base Case for 2022.

The IMF, in its April 2022 update, forecast Eurozone 2022 GDP growth at 2.8% and the UK at 3.7%. Conditions on the ground, evident from polyolefins markets, suggests to me that both the Eurozone and the UK are already in, or close to, recession and that growth will be significantly lower than these estimates.

Conclusion: There have probably never been so many moving parts

There have probably never been so many moving parts, so many factors to consider, when assessing demand and supply in the post peak-pandemic and Ukraine-Russia conflict world. I have never known market analysis to be as complex and as time-consuming as this.

But the rewards for getting Europe right for the major PE exporters – in the Middle East, the US, South Korea, Singapore and Thailand etc – are big, as Europe may provide compensation for weaker markets elsewhere due to higher-than-expected imports. Or it may not, for the reasons described above.

The decisions that the PE exporters make from hereon in will be critical. Every tonne they produce and allocate to the region where the demand is, will of course make them money.

And in a time of volatile and high feedstock costs, every tonne they don’t produce, when they correctly assess that the demand isn’t there in a particular market, will be important in preserving cashflow. CASHFLOW MIGHT BE ABOUT TO BECOME KING AGAIN, AS IN 2008-2009.