The global economy has reached a critical state. In early 2011 the recovery had entered its third year but the pace of improvement slowed as higher energy prices, the disasters in Japan, the Eurozone crisis and the influence of other negative factors spread. A global soft-patch emerged — one centered in manufacturing. Unfortunately for the chemical industry, the manufacturing sector represents its major end-use or customer base.
Dynamic growth has occurred in China and in other emerging markets where recovery evolved into business cycle expansion during 2010. However, in the United States and other developed nations, a typical business-cycle recovery has yet to appear in many sectors. Although US gross domestic product (GDP) surpassed its pre-recession peak in the 3rd quarter of 2011, growth remains slow as of this writing (late November). Business investment and exports have been drivers but recent indicators suggest the robust manufacturing recovery in the United States has lost momentum. Of the nearly nine million US jobs shed during the "great recession," less than one third have returned. High unemployment persists, personal incomes now are shrinking, and Americans continue to be burdened by high debt levels and the impact of lower home prices on household wealth. The nation is in its fourth year of a seven-year deleveraging (of debt) cycle, and an anemic recovery, typical of that from a financial crisis, is the norm.
The consensus forecast (our base-case scenario) for US GDP is for continued but anemic growth through 2012, at a level well below the historic trend. The current "soft-patch" could very well be a typical mid-cycle slowdown, in which case a rebound of activity should emerge. However, economic growth likely won't reach long-term trend levels until 2013. The recovery is fragile, though — multiple risks remain and the likelihood of another recession is high. The wrong trade, tax or other policy initiatives could derail activity.
Temporary supply-chain disruptions from the disaster in Japan slowed growth, adding to the drag from higher oil prices. The European debt crisis continues to present one of the greatest risks to the world economy, as does uncertainty about US debt levels, policy and long-term economic prospects. The stability of the banking system in China is raising concerns in light of massive credit inflation and exposure to real estate and local government loans. Any of these could combine to foster another recession. Prospects going forward represent a two-speed world in which the developed nations (constrained by debt and adverse demographic factors) grow slowly while the emerging markets grow rapidly as a result of industrialization and rising consumer-driven economies.
PROSPECTS FOR CHEMICALS
Most major end-use markets for chemicals, especially those tied to export markets and business investment, have recovered in the United States. The manufacturing sector, which is the largest consumer of chemicals, strongly rebounded during the recovery but growth has slackened as demand has weakened. Industrial output remains below its pre-recession peak in the United States and activity slowed in the 3rd quarter.
A two-speed manufacturing sector, with about one-half of industries soft and others doing well, has emerged. The boom in oil and gas is creating opportunities both on the demand side (e.g., for pipe and oilfield machinery) and the supply side (e.g., for chemicals, fertilizers and direct iron reduction). There's strength in light vehicles and aircraft as well as in industries involved with business investment (iron and steel, foundries, computers, etc.), and a recovery in construction materials. Elsewhere, structural issues are sapping dynamism in a number of industries (textiles, paper, printing, etc.). Forward momentum depends upon demand for consumer goods, which ultimately drives factory output. However, weakening foreign demand (chemicals are early on in supply chain and exports to Europe have evaporated) presents challenges for the manufacturing sectors. Balance sheets are strong and lower raw material costs have benefited manufacturers. Nonetheless, an uncertain business and regulatory environment is constraining business optimism — and hiring.