A hazy shade of winter

The Chemical Industry Association's seasonal business outlook conference had an apppropriately chilly feel, with the cyclical trough looming. Stuart Nathan felt the icy blast.

Turmoil in the Far East, a distinctly patchy recovery, an over-strong pound and the looming prospect of European monetary union with all the uncertainty that entails overshadowed this year's Chemical Industry Association business outlook conference. The annual event kicked off with a forecast for European and British chemicals; but with financial chaos apparently reigning in the East, the forecasters' crystal balls were looking decidedly murky.

The situation in Europe as a whole is quite different from that in the UK, warned Malcolm Mitchell, BP's chief economist. 'I imagine that you would be disappointed if the UK were not out of step with the rest of the European Union,' he quipped.

Often, Britain's habit of being ahead of the other European nations in the economic cycle is advantageous for chemical operators, but this year, the opposite is the case. Overall, European economies are set to grow by 2.4 per cent in 1997, with similar growth this year. However, the CIA's economics panel believes the recovery can be compared to the seasons of the year. Countries like France and Spain, whose GDPs are beginning to grow after a stagnant period, are in the spring. 'In Germany, it is early summer; Spain and the Netherlands are in high summer; and in the UK, although it is still unseasonably warm, it is autumn, just possibly with winter imminent.'

SEVERE WEATHER WARNING?

Of course, it's a British winter, which could mean anything from a slightly chilly overcast to a bone-numbing blizzard. But as far as the chemical industry is concerned, this means that output fell by 0.2 per cent in 1997 the first decline this decade. Even this figure is misleading, however; the decline was due largely to falling volumes in pharmaceuticals, traditionally the sector's powerhouse, as government cutbacks on health spending have begun to bite. By contrast, the heavy end of the industry organics, inorganics and plastics for so long seen as a drag on the sector, are now the most dynamic.

Another problem was the strength of the pound, which sent export volumes tumbling by 4 per cent in Europe. US exports, on the other hand, remained strong.

The situation across the Channel is quite different, with growth rates rising 'inexorably, in an unbroken sequence, with each quarter's annual growth higher than its predecessor' (see chart above). Meanwhile, order books have turned around from the situation at the start of 1996 where they stood at some 10 per cent below normal to 5 per cent above the line; while stocks are at normal levels.

This combination of factors has lead to a projection of 'a substantial improvement over 1996, with a sharp rise in output for both 1997 and 1998,' with chemicals output growing almost 2 per cent faster than the general economy. Moreover, Mitchell added, 'with rising business confidence and increasing capacity utilisation' which is currently exceeding 90 per cent in Germany 'our expectation is that the business community will begin an important programme of investment spending.' This is likely to continue through this year and into 1999, Mitchell said welcome news for equipment suppliers worried about the investment slump in the UK.

Mitchell admitted to 'a certain amount of unease' about the predictions for the coming year in the UK, especially as the CBI is predicting a slow start to the year. This doesn't jibe with CIA predictions, which depend on the momentum built up by high consumer expenditure in 1997 continuing through until the middle of the year. 'Our expectation is that this effect will work its way through the supply chain,' he said.

By this time, the CIA expects the recovery in Europe to gather pace. This will be accompanied by 'a more favourable trend in the Deutschmark zone,' and the two factors together will improve prospects for British exports.

However, there are threats to this scenario, and most of them come from the East. The current turmoil across Southeast Asia and Japan could spread across the world 'and ensnare the global economy,' warned Mitchell. The consequences will be limited, as long as the governments in the affected countries make the necessary structural changes to their economies, and that the west does not over react. 'I personally believe that the overall effect can be contained by a combination of cool heads and appropriate policy,' said Mitchell. 'But make no mistake, the powder keg has been primed and an ill-considered or indifferent response could set off a shot that truly would be heard around the world.'