Another Recession Looming Around the Corner – You May Choose to Believe!

Many experts and economists are predicting another recession in coming year. People’s perception and the indicator chosen varies, but they all are claiming one thing that the recession is coming, and another stimulus may not be able to hold it longer. Let us try to understand few approaches here.

Chemical Industry Capacity Utilization: The chemical industry is one of the largest and most diverse industries globally. The relevance and requirement for chemical is all across the industries and geographies. The capacity utilization rate movement for chemical industry has terrific correlation with IMF growth data and it is not politically biased. The decline in the global capacity utilization rate to 83.1% this January is well below the long-term average of 86.5%. Almost each time the chemical industry operating rate has declined, the recession has made its mark which is expected yet again.

Crude Oil Price & Cost %age to GDP: The crude oil has witnessed another bump with Saudi Arabia adding another production cut. The effort to support the crude oil price is necessity for the sultanate as it needs capital for funding diversification goals. However, the history indicates that whenever the energy cost increases from more than 3% of the GDP, it is followed by the recession. This can be understood by simple understanding that people need energy for keeping their home cool (in summer) and warm (in winters) along with their need for commute to work. If the cost of these energy resources increases, they would have to cut the spending on other areas, thereby resulting in demand decline for other industries. This starts vicious circle which ends-up in recession, bringing the energy prices again in the affordable rage to start over. The prices for crude oil now are hovering again above threshold of 3% of global GDP. The only time it has not resulted in recession is during 2011–2014, when central banks were issuing stimulus. Since that has already resulted in high household dept, this may not give any solution and the recession looks more inevitable now.

Demand Creation & Stimulus: Post 1945, large number babies were born till 1970, which created huge demand, outstripping the supply and creation high inflation. That inflation grew moderately, when these babies moved to workforce. This was further stretched when the Western ladies largely abandoned high fertility and added to the workforce, adding value to economic GDP. However now the tables are tuning, and this increased workforce is retiring, creating almost one fifth of global perennials, which are not adding to production, but on the social spending. The government stimulus which were adding to the consumer power since 2008, have resulted in big dept numbers. These numbers have got central bankers to re-think their strategies to increase interest rates and even another potential stimulus. The new stimulus might not be that effective in holding the consumer sentiments and the bubble lay start leaking in no time.

Going by the analysis by the economists, the recession is coming, and the central bankers have already assessed the possibility. This is clear from the re-thinking of increasing interest rates by the US Federal Reserve and Japan’s Central bank. Chinese bank has already felt the high dept it has created as result of its economic stimulus and European members have changed path regarding stimulus. Only time would tell when and how severe the recession would engulf us, if any. We all can only pray for recession to be brief if not avoidable.

– Ankur Kalra,
Manager – Chemicals & Materials,
Infoholic Research