Chemical industry warns of likely global recession in 2017

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ACC Nov16bThe chemical industry is the best leading indicator for the global economy, and it is flagging major warning signs about the outlook for 2017.  As the chart above shows, based on American Chemistry Council (ACC) data:

  Since 2009, Capacity Utilisation (CU%) has never returned to the 91.3% averaged between 1987 – 2008
  It hit an all-time low at 77.7% in March 2009 after the financial crisis began
  Despite $27tn of global stimulus lending since then, it was back at 78.8% in September
  Even more worrying is that it has seen a steady decline for the past year, from 81.3% in September 2015

And as the ACC warn:

“Growth in the industry has been nearly flat most of the year thus far”.  

ACC G7 Nov16a

The second chart highlights the position in the G7 countries, responsible for nearly half of global GDP, over the past 12 months.  It shows the change in chemical production, using a 3 month average:

  Canada, the smallest G7 economy, has been stable due to its strong export position, at 6%
  Japan has also been stable at 4%, with its trade balance gaining from the yen’s weakness since September 2012
  France has declined from 5.4% to 3.4%, despite benefiting from the euro’s weakness
  Italy has been broadly stable, also benefiting from the euro’s decline, at 2.1%
  The USA, the world’s largest economy, has fallen steadily from 2.2% to just 0.5%
  Germany, Europe’s largest economy, has seen production fall from 2.4% to a negative 0.2% over the past year
  The UK, the world’s 4th largest economy, has fallen from 3.4% to a negative 2.9%

This adds to the disappointing picture in the BRIC economies, which account for over a fifth of the global economy, as I discussed on Friday.  Brazil has been negative for the past 12 months: Russia has collapsed from 15% to 5%;  India has been the best performer, being stable at around 4.5%; China has slowed further from 4% to 3%.

The industry is generally around 6 months ahead of the global economy, because of its early position in the supply chain. Thus in 2008, it was clear from around March that the world was heading into a major downturn.  The Bear Stearns collapse was effectively the “canary in the coalmine”.  My view remains that the Brexit vote at the end of June marked a similar tipping point, as I warned on 27 June.  And as I noted then:

The global economy is in far worse shape today than in 2008, due to the debt created by the world’s major central banks.”

As in 2008, of course, most commentators are still convinced that everything in the garden is rosy.

I fear, however, that soon they will once again be excusing their mistake, by telling anyone who will listen that “nobody could have seen this downturn coming”.  The reason for their mistake, as in 2008, will simply be that they were looking in the wrong place, by focusing on the positive signals from financial markets.  But these lost their key role of price discovery long ago, due to the vast wave of liquidity provided by stimulus programmes.

Unless we see a rapid recovery in the next few weeks, prudent companies and investors would be well advised to heed the clear warning from chemical markets that global recession is just around the corner.

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