Few have experienced a 1970s-style recession, but a similar situation is developing today – a toxic combination of geopolitics, energy shortages and rising inflation – as I note in my latest analysis for ICIS Chemical Business.
The problems have been building for years.
Demographics are destiny. But policymakers refused to accept that today’s ageing populations meant growth was inevitably slowing in all the major regions – Europe, the USA and China.
Instead, they decided from 2003 onwards that they could effectively ‘print babies’ via stimulus policies.
One might have hoped they would reconsider after the near-disaster of the US subprime bubble. But instead they doubled down from 2009 onwards, with China even launching a ‘subprime on steroids’ stimulus programme.
In total, as the chart shows, they have so far added $70tn to their balance sheets since 2003. And some not only reduced interest rates to zero, but even introduced negative levels.
In addition, of course, we are still suffering from the impact of the Three Horsemen of the Apocalypse:
- First, there was the pandemic, which has not gone away. China is particularly impacted due to its lack of effective vaccinations, with Shanghai’s GDP declining 5.7% in H1. In turn, the continuing lockdowns are playing havoc with global supply chains
- Then there was the energy crisis, as natural gas prices rose to record levels in Europe. If Germany’s economy now stumbles under the impact of gas rationing – as seems inevitable – the impact will be felt around the world
- Plus there is the rising risk of food shortages, as higher gas prices lead to dramatic fertiliser cost increases. Farmers are now having to either increase their own prices for the new season, or to cut back on production
Problems are also developing in financial markets. China’s real estate bubble is 29% of its economy, and it is now starting to burst in epic fashion.
Western housing markets also look vulnerable, as do stock markets, as interest rates start to return to more normal levels. And currency markets are adding to the problems as the traditional flight to safety pushes the US dollar higher.
As the head of Germany’s Employers’ Associations warned last month:
“We are facing the biggest crisis the post-war Federal Republic has ever had. We have to be honest and say: First of all, we will lose the prosperity that we have had for years”.
Similarly, BASF has warned that its entire Ludwigshafen complex, the world’s largest chemicals hub, may be forced into major cutbacks due to the reduction of Russian gas supplies.
None of us have ever seen circumstances like this. But there are certainly some similarities with the oil price crises of the 1970s/80s. These also involved a toxic combination of geopolitics, energy shortages and rising inflation and interest rates. And there was the same initial refusal, as today, to accept that we faced major problems.
As the chart shows, policymakers were slow to respond when inflation began to spike during the first oil crisis in 1973/4. And so they were already on the back foot when the second oil crisis occurred in 1979. As a result, the benchmark US 10-year Treasury rate was still playing catch-up as the inflation rate reached its 14.6% peak in 1980.
We can, of course, all hope that today’s problems find a way of magically resolving themselves. But hope is not a strategy. As the chart suggests, tomorrow’s Winners will be those companies who accept today’s challenge of planning for a more difficult and uncertain future.
Manufacturing, in particular, has a vital role ahead. It is key to implementing safer, greener, faster and cheaper continuous processes. These will be essential to maintain competitiveness in tomorrow’s more sustainable and circular world.
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