Common sense continues to elude central banks as they battle demographic cliff

Economic growth

SHARE THIS STORY

Index Jan16aCentral banks are in a losing battle, as they try to reverse the inevitable slowdown created by the arrival of the demographic cliff.  Last year’s 5% fall in global GDP in current dollars tells its own story.

Common sense would tell them they can’t possibly win.  After all, how do you persuade New Olders in the 55+ age group to spend more money – when they already own most of what they need, and their incomes are declining as they enter retirement?

  • The New Olders will soon be 1 in 5 of the global population thanks to vastly increased life expectancy
  • And there are relatively fewer of the high-spending Wealth Creators aged 25-54 due to collapsing fertility rates

But as I feared in my Budget Outlook for 2016-18, this won’t stop central bankers from trying. Last Friday, the Bank of Japan joined the European Central Bank in moving to negative interest rates – where you pay the bank to look after your money. This is likely to create further problems in high-yield and emerging market debt, to add to those already appearing, as investors rush into stupid high-risk investments in a desperate search for yield.

As Time magazine has reported, even the strongest and best-managed companies are now being impacted:

“As Moody’s recently warned, some of the world’s biggest firms, like Royal Dutch Shell, Total, and Chesapeake Energy, are among the 175 firms that are at risk of ratings downgrades thanks to plunges in commodity prices.”

Of course, the Japanese move produced the usual knee-jerk rally in financial markets, confirming once again that the biggest rallies always occur in bear markets.  This time last year, the ‘SuperBowl Rally‘ saw oil prices rally from $45/bbl to $70/bbl, before they resumed their fall to today’s levels around $30/bbl.

But this only highlights the growing vulnerability of Western stock markets.  The chart of the IeC Boom/Gloom Index shows sentiment is weakening and market volatility is increasing.  This usually indicates a market is changing direction.  And the Index itself is now firmly back in negative territory, confirming the downturn signalled last month.

As with subprime, the banks are blind to these developments.  They are sure their economic models are just about to produce a sustained recovery, and so they see no need to consider other viewpoints.  It could be a very bumpy ride.

WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Brent crude oil, down 68%
Naphtha Europe, down 63%. “Naphtha crack slips into negative territory – US gasoline inventories rise once again”
Benzene Europe, down 60%. “Prices in Europe have seen some roller coaster action over the past week.”
PTA China, down 47%. “Restocking of cargoes were just about finished, with most companies expected to stop business activities from next week due to the Lunar New Year holidays”
HDPE US export, down 42%. “Export prices remained steady”
¥:$, down 18%
S&P 500 stock market index, down 1%

PREVIOUS POST

Renault's success with Dacia highlights changes underway in European auto markets

29/01/2016

You never meet a shy and retiring car salesman.  They are always bursting with ...

Learn more
NEXT POST

China's polyethylene market creates Winners and Losers

03/02/2016

Tens of billions of dollars have been spent over the past 6 years to produce the...

Learn more
More posts
Pandemic redraws the map
11/10/2020

  Companies have entered a new landscape where the coronavirus has accelerated major paradigm s...

Read
What will happen if President Trump loses the election?
04/10/2020

I spent from September 2015 onwards, during the last US Presidential election, trying to explain why...

Read
Covid fears risk a Great Depression and major social unrest
27/09/2020

Governments spent most of February/March ignoring my warnings here on the dangers posed by the Covid...

Read
The state of the global economy in 2020
13/09/2020

Last Wednesday, I gave the opening presentation for the ICIS PET Conference and looked at whether th...

Read
Reality dawns for business as No Deal Brexit approaches
06/09/2020

I warned before the June 2016 Brexit referendum that Brexit was all about politics, and Boris Johnso...

Read
Global chemical industry – key trends for success in today’s New Normal
02/08/2020

The chemical industry is the best leading indicator for the global economy. On Friday, I had the pri...

Read
Oil prices signal potential end to the V-shaped recovery myth
26/07/2020

Oil prices have moved into another ‘flag shape’ – which previously provided critic...

Read
Bankruptcies now the key risk as hopes for V-shaped recovery disappear
19/07/2020

Governments, financial markets and central banks all originally assumed the Covid-19 pandemic would ...

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