Policy makers reach the fork in the road, again

Economic growth

SHARE THIS STORY

D'turn 26Jan13.png

“Two roads diverged in a yellow wood, And sorry I could not travel both”

These lines by famous American poet Robert Frost provide a good description of the critical cross-roads now being approached for the 3rd time since June 2008, as the impact of the QE3 stimulus reduces. Each time previously, policy makers have simply refused to accept that the world is now at a ‘demographic cliff’, where people live longer and spend less: •Yet demographics mean that all the major economies have gone ex-growth. Large and increasing numbers of people are now at the age when they only need to buy replacement items. And they also have less money to spend because they are approaching retirement•Refusing to accept this obvious fact is like trying to make water run uphill. Central banks and governments have had to massively increase debt levels to fund their stimulus programmes and/or tax cuts. Thus the US Federal Reserve now has $3tn debt compared to $900bn in 2008The chart shows how markets have moved since the June 2008 peak:•China has been the biggest “winner”. PTA prices (red line) have benefited from two major rounds of stimulus (November 2008-December 2010, May-October 2012). But “winning” has meant creating a ‘wealth effect’ by boosting home prices to record levels versus earnings. As the US subprime boom showed, such credit bubbles are fun at first but unpleasant afterwards•US financial markets have also done well. The S&P 500 index (brown) is back at the 1500 level which capped previous advances in 2000 and 2007. Oil prices have also boomed as the Fed’s efforts to reduce the value of the US$ led pension funds to see oil as a ‘store of value’. But high oil prices end up destroying demand and negating the stimulus impact Sadly, policy makers’ efforts are doomed to fail in the end. As the Boston Consulting Group reported recently, each new dollar of debt created today adds just 18 cents of extra GDP growth. By comparison, a new dollar of debt added 59 cents of new GDP growth in the 1960s, when populations were younger and consuming more.In addition, the need to repay the borrowed money creates even greater headwinds for the wider economy. Comments on key product markets by senior ICIS pricing editors highlight the poor state of demand in the major economies:•In China, Becky Zhang notes “Given the weak polyester demand, a number of Chinese polyester makers have planned plant shutdowns in January and February to relieve inventory pressure. A total of 4.6m tonne/year polyester capacity will be offline during the holiday. Operating rates on polyester staple fell sharply by 10% to 56% capacity“•In the US, Michelle Klump reports “Higher ethylene prices are based on tight supply caused by several planned and unplanned cracker outages after “a weak fourth quarter (for PE demand)” •In Europe, Linda Naylor confirms “It is clear to all that increases are due to high feedstock costs and production cutbacks rather than any fundamental strength in the PE market”What happens next is anyone’s guess. Will this be the time that policy markers decide to recognise reality, and give up on the myth of being able to create ‘non-inflationary constant expansion” in the global economy? Or will they, as in Q2 2012, try yet another even-larger round of co-ordinated stimulus and tax cuts? Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, and latest ICIS pricing comments are below:Naphtha Europe, dark brown, down 14%. “Much of the recent surplus has been offloaded as a result of an open arbitrage to Asia”PTA China, red, down 12%. “Majority of textile factories in China are to be closed from early February to end-February”HDPE USA export, purple, down 11%. “Continued to firm as tight supplies helped boost prices”Brent crude oil, blue, down 10%Benzene NWE, green, up 8%. “Lukewarm derivative demand and global price volatility keep activity subdued”S&P 500 stock market index, brown, up 10%

PREVIOUS POST

Japan aims for major devaluation

26/01/2013

Some trends play out tactically in days or weeks. Others move more slowly over m...

Learn more
NEXT POST

Chinese buy $100 smartphones, not iPhones

29/01/2013

One of the great myths of recent years has been that China – whose populat...

Learn more
More posts
No Deal Brexit still a likely option if opposition parties fail to support a new referendum
15/09/2019

Canada’s normally pro-UK ‘Globe and Mail’ summed up the prevailing external view of Brexit las...

Read
UK, EU27 and EEA businesses need to start planning for a No Deal Brexit on 31 October
28/07/2019

New UK premier, Boris Johnson, said last week that the UK must leave the EU by 31 October, “do or ...

Read
London house prices edge closer to a tumble
21/07/2019

After the excitement of Wimbledon tennis and a cricket World Cup final, Londoners were back to their...

Read
G7 births hit new record low, below Depression level in 1933
14/07/2019

If a country doesn’t have any babies, then in time it won’t have an economy. But that...

Read
From subprime to stimulus…and now social division
06/07/2019

The blog has now been running for 12 years since the first post was written from Thailand at the end...

Read
Resilience amidst headwinds is key for H2
30/06/2019

Resilience is set to become the key issue as we look forward to H2, as I note in a new analysis for ...

Read
Perennials set to defeat Fed’s attempt to maintain the stock market rally as deflation looms
23/06/2019

Never let reality get in the way of a good theory. That’s been the policy of western central b...

Read
Europe’s auto sector suffers as Dieselgate and China’s downturn hit sales
16/06/2019

Trade wars, Dieselgate and recession risk are having a major impact on the European auto industry, a...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more