Growth set to slow down for European chemicals

The coming year is set to be another one of growth for the European chemicals industry, albeit at a much slower rate than in 2000.

Slower growth is forecast for the chemical industry in Europe in the next 12 months. Speaking at the CIA's annual business outlook conference at the end of January, Malcolm Mitchell, chief economist at BP Chemicals explained that chemicals output in Europe is expected to rise by 3.5%, down 1% on 2000. This is set against a background of a slower general economic growth in the area of 2.75–3%.

The key to growth prospects for the year lies with the US, he explained. In 2000, for the fourth year running, the US economy had a growth rate in excess of 4%. 'In H1 2000, the US grew at an annualised rate of 6%, which was neither sustainable nor indeed desirable,' he said. 'In the second half, there were clear signs of a slowdown from such a frenetic pace to much nearer 2.5–3%.' This deceleration can be attributed to a downshift in both consumer and business activity, reflecting several factors, including a drop in savings, a slowing in payroll growth and signs of rising unemployment. Higher interest rates have also had an effect, as have higher energy prices which have removed around 1% from consumers' real incomes thus far. And business investment is being curtailed as a result of the squeeze on corporate earnings.

This is a major turnaround from last year, when all talk was of restraining the economy to avoid over-heating. The debate is now how much interest rates need to be cut to prop up the economy.

Last year, the expectation was that Europe would grow more quickly than the US, but, says Mitchell, it has become evident that Europe has begun to slow without ever reaching the heights that the US economy did. 'The cycle already seems to have peaked,' he said, 'with some easing of consumer demand as higher interest rates and energy prices have begun to bite. The problem for Euroland is that a combination of rising oil prices and a falling Euro have, in almost equal measure, driven inflation through the central bank's self-imposed 2% ceiling.' This led to the European central bank raising interest rates seven times in the year to cut inflationary pressures, but at a risk of curtailing the recovery.

continued Asian recovery

The recovery in Asia-Pacific is expected to continue, albeit at a slower rate of 5–6%. The region is currently running a trade surplus, is less dependent on short-term foreign debt, and there has been some progress on restructuring. In particular, China appears to be emerging from seven years of deceleration, and Japan is now out of recession.

The sharp rise that occured in oil prices had a big effect on the chemical industry in 2000, but Mitchell expects prices to remain well off the peaks seen last year. Increasing gas prices are likely to have more of an effect on the economy in the coming year.

As shown in Fig. 1, there was a rapid growth in European chemicals output in 1999, which reflected the strong export position to both Asia Pacific and the US and a substantial inventory build-up in Europe. Growth gradually decelerated through 2000, falling back to 3–4% by the second half of the year. Mitchell believes the slowdown from the global peak will continue such that global production in 2001 falls to around 3.5%, and Europe is expected to decline to about this level.' This represents a full percentage point on last year, or the growth rate reducing by a fifth.' The cyclical downturn is expected to continue worldwide in 2001, as shown in Fig 2, where the 2000 figure is an estimate, and 2001 a forecast.

The past year has seen a rise in European chemical prices by about 6%. However, much of this was influenced by oil feedstock costs, which rose by about 80% in Euro terms. This year, the guess is that price rises will be much lower in 2001, maybe around 2.5%, which is a reflection on weaker markets and lower feedstock prices. 'With oil prices, for one, fluctuating wildly,' he added, 'the answer could lie almost anywhere within quite a wide range, accepting that it will be much lower than last year's figure.'

Splitting the predictions into separate countries, a further slight fall from last year's projected 3.2% to 3% is anticipated in Germany, a small rise from 4.0 to 4.1% in France, whereas Italy is expected to have a much bigger drop in chemicals production from 4 to 3.2%. A similar drop, from 4.5 to 3.7% is predicted for the UK.

'Compared with the blistering pace of recent times,' he said, 'our base case will feel downright frosty, but compared with the recession of the early 1990s, then relatively comfortable. We need to keep a sense of perspective and not talk ourselves into unnecessary depression and risk creating a self-fulfilling prophecy. I think that with good policy and a slice of luck we can achieve an economic temperate zone.'