Forget the IMF: global chemicals are your guide to future performance

Economic growth

SHARE THIS STORY

The chemical industry provides a far better guide to the economic outlook than the IMF or any economic forecaster, as I describe in my latest post for the Financial Times, published on the BeyondBrics blog
ACC Nov16

The global chemical industry has long been the best real-time indicator of the global economy. This is partly because of its size, as the third-largest industry in the world after agriculture and energy, but also because of its global and application reach. Every country in the world uses relatively large volumes of chemicals, and their applications cover virtually all sectors of the economy, from plastics, energy and agriculture to pharmaceuticals, detergents and textiles.

The first chart confirms the position, showing the latest IMF data for global GDP versus the American Chemistry Council’s (ACC) data for global chemical Capacity Utilisation (CU%) since 1988, in terms of percentage change from the previous year:

  The IMF data are for the percentage change in global GDP at constant prices (their “headline number”), using the October 2016 World Economic Outlook
  The ACC data show the percentage change in CU% updated to include reported data for August 2016

As can be seen, there is extremely close historical correlation between the two sets of data. But crucially, the ACC data are real-time. They are produced within a few weeks of the end of each month, whereas the IMF data only appear after a time lag of many months.

Equally important is that the IMF’s forecasts have proved to be wildly over-optimistic since the start of the financial crisis, as demographic headwinds have now replaced the tailwinds which created the baby boomer-led supercycle that began in 1983. Had the ACC’s data been used as the base case, unnecessary investment would have been discouraged. Even more importantly, policymakers’ wishful thinking about the ability of monetary policy to restore economic growth would have been challenged much earlier.

ACC Nov16a

The ACC data are equally valuable when it comes to understanding the outlook for individual country economies, as the second chart confirms. It shows developments since 2014 for the Bric countries:

Brazil has been the most consistent, but unfortunately in a negative sense. Its chemical production went negative in mid-June 2014, providing investors and companies with ample warning that major problems lay ahead for the economy. The chart provides some hope that the situation may be improving, but cautious observers may be forgiven for worrying that production has yet to record a positive performance after more than two years.

Russia has provided the most volatile performance, due to oil price movements. The key issue is that lower oil prices support chemical demand, as consumers need to spend less on essentials such as transport and heating and have more discretionary income. Production was down 11 per cent in July 2014, just before the oil price collapse, but then rebounded to a positive 15 per cent by September 2015. Since them, of course, the doubling of oil prices since the New Year has hit output again, leaving it up by around 5 per cent.

India has also been volatile. Production tumbled during the run-up to premier Narendra Modi’s election in 2014, and remained negative into the early part of 2015. Since then, production has been in positive territory, averaging around 4 per cent since March 2015, as tangible evidence of economic reform has begun to appear.

China has provided the most stable performance, with production fluctuating between a low of 3 per cent and a high of 10 per cent over the period. Key support has been provided by the government’s drive to increase China’s self-sufficiency. This has often meant that imports, rather than domestic production, have taken the pain of slowing domestic demand. In some major products, such as PVC, China has actually moved from being the world’s leading importer to become a net exporter.

Chemical industry performance is therefore not just an excellent guide to the outlook for the global economy. It is also a reliable indicator of the economic state of the world’s major economies. The fact that the global CU% has fallen every month this year, and is now at just 78.8 per cent – nearly equal to its post-crisis low of 77.7 per cent in March 2009 – is therefore grounds for concern. It contradicts the buoyancy being seen in a number of major financial markets and suggests that investors may find it is better to travel in hope than to arrive.

Paul Hodges publishes The pH Report, providing investors and companies with insight on the impact of demographic changes on the economy.

PREVIOUS POST

S&P 500 volatility close to 43-year lows as uncertainty rises

02/11/2016

Something very strange is happening in US stock markets, as the above chart high...

Learn more
NEXT POST

Chemical industry warns of likely global recession in 2017

07/11/2016

The chemical industry is the best leading indicator for the global economy, and ...

Learn more
More posts
China’s lockdown makes global debt crisis now almost certain
23/02/2020

Beijing has a population of 21.5 million, but you wouldn’t know it from this BBC video from la...

Read
Financial markets head for (another) train crash as coronavirus starts to impact
17/02/2020

China’s industrial heartland of Hubei (pop 59m) and its capital Wuhan (pop 11m) have now been ...

Read
Coronavirus disruptions make global recession almost certain
11/02/2020

Last month, our Hong Kong-based pH Report colleague, Daniël de Blocq van Scheltinga, warned of the ...

Read
Your A to Z Guide to the Brexit trade negotiations
02/02/2020

A. Article 50 of the Lisbon Treaty set out the rules for leaving the European Union. As with most ne...

Read
Contingency planning is essential in 2020 as “synchronised slowdown” continues
12/01/2020

The IMF has now confirmed that the world economy has moved into the synchronised slowdown that I for...

Read
Boris Johnson will have to disappoint someone in 2020 as the UK finally leaves the EU
15/12/2019

Finally, after three and a half years, the UK has reached “the end of the beginning” wit...

Read
ACS Chemistry & the Economy webinar on Thursday
10/12/2019

Please join me for the next ACS Chemicals & Economy webinar on Thursday, at 2pm Eastern Standard...

Read
What’s next for Brexit and chemicals?
04/12/2019

The UK is about to go to the polls again to try and decide the Brexit issue.  Chemicals will be one...

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