The economic sky turns cloudy

Experts forecast modest economic growth at best. The global economy is slowing, led by a pronounced weakness in the United States resulting from the housing downturn and the credit crunch. And this, of course, will significantly impact the chemical industry.

By Seán Ottewell, editor at large

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BASF, Ludwigshafen, Germany, had based its original 2007 economic outlook on three factors: annual global economic growth of 3.5%, an average oil price of around $70/bbl (for Brent crude), and an average exchange rate of $1.35/€. In October, Kurt W. Brock, its chief financial officer, observed: “On the basis of what we’re seeing today — and I would like to stress the word ‘today,’ — there’s nothing to suggest that we should be pessimistic about the nearer future. Of course, we are looking at what is happening with regard to the larger picture in the United States, and we expect growth there to slow somewhat. Nevertheless, we should not forget that this means that U.S. growth will still be around 2%. That’s a growth rate we didn’t dare to dream of only a couple of years ago in Europe.” The company says it won’t make any further statements before its financial outlook for 2008 is released in February.

A building concern

Meanwhile, an October 2007 report from the Institute of Supply Management (ISM), Tempe, Ariz., showed that the U.S. manufacturing sector expanded for the ninth consecutive month. At the same time, however, this growth was the lowest for eight months.

“It does appear that the slowdown in the financial, housing and transportation segments has spilled over into manufacturing,” commented Norbert J. Ore, chair of the ISM’s manufacturing business survey committee.

The ACC agreed.   “Overall it’s clear that sub-prime and related problems have affected housing and are now affecting manufacturing,” states its November “Chemistry and Economic Trends” newsletter. ACC points out that, on average, the housing sector purchases $8 in chemicals for every $1,000 of output, and more than twice as much indirectly for products such as pipes, coatings and sealants.

Construction spending in the U.S. in 2007 was worth $1.163 trillion, estimates the U.S. Department of Commerce’s Bureau of the Census, Washington, D.C.. However, this represents a year-on-year rise of just 0.3%.

The view from Brussels


The relatively modest growth expected in the U.S. is prompting serious concerns in Europe. For instance, the Brussels-based European Commission (EC) in its autumn economic forecast predicts growth moderation in Europe, from 2.9% in 2007 to 2.4% in both 2008 and 2009. Issued in November, the report takes account of “turbulence in the financial markets that has caused tighter financing conditions and increased uncertainty.”

The analysis assumes that the financial distress will gradually peter out. However, it warns: “Some segments of the financial markets are still malfunctioning, and a more prolonged period of uncertainty cannot be ruled out.”

“Clouds have clearly gathered on the horizon with this summer’s turbulence in the financial markets, the U.S. slowdown and the ever-rising oil prices,” said Joaquín Almunia, economic and monetary affairs commissioner.

As far as chemicals, the European Chemical Industry Council (Cefic), Brussels, is predicting industry growth — excluding pharmaceuticals — of just 1.9% in 2008. That compares with 2.1% in 2006 and an expected final 2.6% in 2007. In terms of growth in gross domestic product (GDP), Cefic believes that only North America and Japan will fare worse, with South America (up 4.8%), Eastern Europe (up 5.6%) and the emerging Asian markets (up 7.6%) driving worldwide growth (Figure 2).

Figure 2

Cefic’s forecast also comes with a proviso with regard to the region’s sensitivity to a number of downside risks: “First, the continuing U.S. dollar weakness against the euro weighs more and more heavily on the export performance of E.U. [European Union] industry. Secondly, continuously high oil prices, though they have apparently so far had only a limited dampening effect on the overall macro-economic environment, will lead to higher production costs and lower consumer and business confidence. Last but not least, the financial crisis in the U.S.A. could have a stronger than expected impact on the world economy.”

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