US buoyed by macro competitive advantages

Joseph Chang

29-Mar-2019

The structural strength of the US economy relative to the EU, China and other countries on the global stage offers a persistent competitive advantage that can drive or support the chemical sector in the years ahead.

However, the US is certainly not immune to global headwinds, especially with its two main trading partners slowing considerably.

Concerns about a major economic slowdown in 
the US have brought 10-year Treasury yields to 14-month lows, and the three-month and 10-year Treasury yields briefly inverted, signaling a potential recession on its way.

US senior executives at the International Petrochemical Conference (IPC) hosted by the American Fuel & Petrochemical Manufacturers (AFPM) were mostly optimistic on the outlook for the sector, while acknowledging near-term softness.

“There was some apprehension, with the concern that the US economic revival has gone on a long time. But with low unemployment, tax breaks and strong earnings, there’s some confidence the expansion will be extended, especially with a China agreement that is looking very favourable” said James Ray, senior consultant at ICIS.

TOP LEVEL VIEW

The annual Huntsman breakfast at the IPC offers unique insights from the CEO of a US-based but global chemical company who uses the forum to unleash unbridled views on macroeconomics and geopolitics among other sundry items.

Peter Huntsman took a top level view of worldwide economies based on GDP and GDP growth, unemployment, debt, borrowing rates, energy dependency and demographics.

After a period of 1-1.5% US GDP growth in the years following the 2008-2009 financial crisis, “the best minds thought the future was 1% growth”, 
noted Huntsman.

However, the Trump tax cuts in 2018 generated a big enough jump in economic growth that a smaller percentage tax base generated record government revenue. US GDP growth surged by 2.9% in 2018 after rising 2.2% in 2017. While this has “seemingly worked for now”, the US total debt has continued to shoot up – by about $2 trillion from the end of 2017 to today.

“The spending is ridiculous. Shame on the President and Republicans and Democrats, because no one is doing anything about it,” said Huntsman.

Huntsman calls the ballooning US debt, now equivalent to about 106% of GDP, “truly frightening” and the “Achilles heel” of the US economy.

The US is one of the only major economies growing above 1%, discounting China’s unusually steady and thus suspect GDP growth, he pointed out.

The US economy at a size of about $20.5 trillion, has low unemployment of 3.8%, low borrowing costs of 2.7% and debt of 106% of GDP, the CEO highlighted.

Because of the burst in shale oil and gas production, it is basically energy neutral when it comes to energy dependence.

This has major geopolitical implications. With the US energy neutral, and much of the oil and gas going to Asia and Europe, “who is going to protect that oil flow?” asked Huntsman.

The US had been the global energy watchdog, but that may shift. “You can see why China is getting more aggressive in building a navy,” he pointed out.

And the US is also not as dependent on exports as others. US exports are nearly 10% of GDP compared to about 45% for the EU and 20-25% for China, Huntsman said.

It’s no wonder the US is pressing its advantage on the trade front. “China desperately needs a trade deal. The US could use it,” said Huntsman.

Lastly, US demographics look favourable, and only because of immigration.

“The US has a falling birthrate but the growing immigrant population more than makes up for it with 1.1m legal immigrants on a yearly basis – the highest in decades. And immigrants assimilate pretty well as we’re a nation built on immigrants,” said Huntsman.

“We must not turn our backs on them. We would have a population collapse if not for immigrants,” he added.

As for Trump and his re-election chances in the November 2020 election, the biggest threat is himself, said the CEO.

“Given where the economy is… his approval rating should be 75%. It’s such a squandered opportunity to lead by example,” said Huntsman.

CHINA’S CHALLENGES

Analysing China’s $13.5 trillion economy, the 6-7% GDP growth figures are “essentially improbable”, said Huntsman. “Anyone who does business in China would be surprised if China had any GDP growth in Q4 – that goes for politicians and businesspeople,” he added.

China’s economy “feels like” it’s been growing at 2.5-3%/year but with momentum slowing significantly in the last couple quarters, said the CEO.

China’s debt/GDP is likewise immeasurable with estimates ranging from 48-300%, and it is an energy net importer at about 20% of consumption with local use heavily dependent on coal, he said.

China also faces a demographic crisis of a rapidly ageing population which it is trying to counteract with the relaxing of the “one child policy”. But it will be challenging to reverse the trend. “I’ve never seen a successful programme where governments can create life, especially as women become more independent,” said Huntsman.

“China faces trials with large macro issues on energy, debt and demographics,” he added.

EU GROWTH STALLS

As for the Eurozone, the region has not seen 1% GDP growth in the last decade.

The EU project of open inner borders, trade and transport, and thus ease of doing business was supposed to spark growth and a reduction in youth unemployment.

“The lack of economic opportunity and vitality is one of the threats to the cohesiveness of the EU” and has led to the rise of populist movements, said Huntsman.

The $18.8 trillion economy has unemployment of 6.4%, ultralow borrowing costs of 0.8% and debt at 85% of GDP. It is about a 50% energy net importer.

“The low interest rate was the stimulus and now the ECB (European Central Bank) can’t do that anymore. And the debt is worse than it looks because if you don’t have economic growth and stimulus, and have to import energy while you’re outlawing nuclear and coal, [it’s going to rise much faster],” 
said Huntsman.

On top of that, the demographics are not working in the Eurozone’s favour with an ageing population, he noted.

“I’m not a Eurosceptic by any means but I wonder how the EU can counterbalance the negative forces,” said Huntsman. ■

 

 

 

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