Facing global realities Growth shifts to the US and Asia

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

Eurozone’s zombie recovery

Whatever it takes to get the eurozone’s economy growing is going to be a lot more than it’s getting.

Two years after Mario Draghi, President of the European Central Bank, pledged to do ‘whatever it takes’ to unfreeze Europe’s financial system and kick start growth, the words continue to resonate. Only this time the echo has a distinctly ironic ring.

The mere prospect that the ECB would take action was sufficient to pull government debt markets back from the brink. Government bond yields in the eurozone’s stricken peripheral economies fell back, while the euro rose. That was arguably the last thing that countries trapped in recession wanted to see – a sharp devaluation would have been more appropriate.

Most of the eurozone economies have now hauled themselves out of recession. Germany has recovered strongly. But across much of the eurozone, the recovery pace has disappointed: the 18-country zone grew by just 0.2 per cent in the first quarter – half the rate expected by economists. Some now query whether there is a meaningful upturn at all. It seems more like a zombie recovery – the eyes are open and there’s movement of sorts. But there’s a disturbing sense that little more else seems to be moving – or, if it is, not in a way ordinary mortals would recognise.

Back in May the ECB finally responded with policy action. First, it announced that it would galvanise longer term refinancing operations – effectively making cheap loans available to banks in the hope that this would encourage them to lend more to companies.

The move reflected similar policy action in the UK in the form of the Funding for Lending scheme. Unfortunately, it may be doomed to experience the same results. Much to the frustration of government spokespeople, lending to companies in the non-financial sector has continued to fall. The initiative may have helped to prevent a much more severe contraction which would have sent the economy into a deeper downturn. But it has hardly worked to galvanise company borrowing for expansion.

Here was a reminder that other factors were playing on the lending figures: a continuing reticence or distrust across business to rely on banks for additional finance, and a lack of ideas for new investment. Business confidence is a sine qua non for any expansion or new investment. And, as optimism across the eurozone is at a notably low ebb, it is doubtful whether this move by the ECB would, on its own, have a significant effect.

But the action that attracted greater attention was the cut in official interest rates. A magnifying glass would have been needed to spot the 0.1 percentage point reduction. More notable was the move to negative interest rates on deposits with the ECB to act as an incentive to spending.

Some now query whether there is a meaningful upturn at all. It seems more like a zombie recovery – the eyes are open and there’s movement of sorts. But there’s a disturbing sense that little more else seems to be moving

Cancelled out

But how much of a boost to growth might come from lower interest rates? Hang on to that magnifying glass. Economists suggest that, for every one percentage point cut in interest rates, GDP is raised by between 0, 9 per cent and 3 per cent. Even taking the higher estimate, the ECB rate cuts, says economist Chris Dillow, would raise GDP by just 0.3 per cent after 18 months – barely discernible amid the surrounding statistical noise.

And even this is unlikely to prevail against the downward push of fiscal policy across much of the eurozone. Economies are having to pursue deficit reduction policies to bring billowing debt under control. Tight fiscal policy, says Dillow, is likely to wipe 0.9 per cent off GDP. Put another way, fiscal policy will work to depress output by around three times as much as the ECB’s rate cuts will raise it. ‘Whatever it takes?’ When it comes to economic stimulus the effects of the ECB’s actions may be invisible.

It’s hard to see how the eurozone will be able to improve on current modest estimates of growth for this year. For example, economists at accountancy giant Ernst & Young forecast eurozone growth of just 1.1 per cent this year – this after two years of GDP decline and assuming no spill-overs from the Ukrainian and Middle East crises.

For 2015 it foresees growth improving to 1.5 per cent. But this would be a pallid performance compared with expected growth rates in the US and the UK. And the problem of divergence within the eurozone looks set to remain. This suggests a growing gap between the performances of Germany and the Baltic states and those of Greece, Spain and Italy. Countries that have been slow to respond to the need for change will, says E&Y, continue to lose competitiveness and face sluggish growth.

And the threat of deflation has not gone away, with eurozone inflation at just 0.5 per cent. Growth of money supply is still weak and slowing in much of the region. Deflation, or even a period of very low inflation, would add to the problems of sluggish growth by raising real levels of debt and by delaying spending and investment decisions. More aggressive ECB action almost certainly will be needed. n

Headquarters of the BASF Group - Ludwigshafen

FACING GLOBAL REALITIES

After two years of declining output, the European chemicals industry looks likely to return to growth in 2014. But there are deep doubts in the industry about how long the recovery will last in the short to medium term. Sean Milmo reports.

IN 2010 the chemicals sector seemed to have bounced back after the 2008 financial crisis with production soaring by close to 11 per cent. But the upswing quickly faltered with growth slipping to only 1.9 per cent in 2011 and then disappearing altogether in 2012 and 2013 with drops in output of 2.3 per cent and 0.2 per cent respectively.

This lack of confidence in the growth prospects of the sector is being shown by its chemical multinationals which are switching investment into the rapidly expanding economies of Asia and into the US to take advantage of its shale-gas boom.

“We have to face reality,” Hariolf Kottmann, chief executive of Clariant, one of Europe’s leading international speciality chemicals companies, told a press conference in Frankfurt in June. “Europe is a key region for us but its economy is not performing as well as it should. We are expecting only flat or low level growth in Europe. We have to invest in areas of high growth like Asia. The future of this company lies in Asia.”

Europe at present accounts for around 40 per cent of its sales with Asia’s share being about 30 per cent and the remainder mainly comprising sales in the US and Latin America. But the company expects that within a few years the largest proportion of its sales will be in Asia.

While Europe’s major international chemical companies have been broadening their operations across the world, new visions have been emerging of ways to give the European industry a stronger platform for long-term growth. These mainly involves making greater use of the sector’s strengths in R&D and upstream-downstream integration to establish new supply chains, some of them in collaboration with other process industries.

Weak growth

While the sector reorganises itself, however, it looks set for several years of static output or at best relatively small average increases in production.

In its mid-year forecast issued in June, the European Chemical Industry Council (CEFIC), the region’s chemicals trade association, upgraded its predictions for growth in chemicals output in 2014 from 1.5 per cent, made last October, to 2 per cent. This was due to rising demand from some of its big customer