Tough times ahead for the industry

Ashley Moxom highlights the continuing economic problems in the manufacturing and chemical sectors

The current global economic climate is not good. The UK's manufacturing industry is technically in recession, having experienced two successive quarters of negative growth in output. The economists' predictions for growth this year, albeit slower than in recent years (see Manufacturing Chemist, March 2001) are looking hopelessly optimistic. The last quarter in the UK was the worst for the manufacturing industry in a decade, and the UK budget forecast a growth of around 2.5% is unlikely to be met.

Yet, until recently, the outlook was very different. Optimism was rife that an economic recovery would be in full swing by the end of this year, led by the US and its fiscal policies of tax giveaways and substantial interest rate cuts.

The UK industry is not alone in experiencing a bad time. Economists are now predicting a growth in GDP in Germany as low as 0.8% for the year, and the German Chancellor Gerhard Schroder's promise to cut job queues seems increasingly hollow.

France is suffering as well. The French national statistics office's latest monthly report on industry highlighted a continued negative expectation amongst corporate France, and a big drop, down 15 points to ;36, on its scale of business confidence. French companies are clearly concerned about the international business climate.

Switzerland, too, is seeing the effects of downbeat corporate financial reports and job losses, and overall companies are expecting a drop in profits of around 10% on last year's figures, indicating a substantially slower economic growth.

Ireland, where many of the world's major pharmaceutical companies have a manufacturing base, is still expecting economic growth of maybe 5% to 7% this year. But the increasing rate of job losses is leaving commentators less optimistic that this will be achieved, and further falls in the global outlook are likely to have an effect.

The recovery in south east Asia has also been checked, and numerous south American countries, notably Argentina, are suffering. Forecasts that growth in GDP in Asia would be better than in Europe and the US were clearly extremely optimistic, and dramatic falls in growth rates throughout the region have been seen instead. The government in the world's second largest economy, Japan, is trying to ease the situation there by approving a huge cut in its budget, a move which is unlikely to instil much confidence in business.

Global prospects are being dominated by the situation in the US, which has seen a much larger drop in manufacturing than expected, with the last year being the worst in a decade. The fall-out is hitting European industry hard. The growth rate for the present quarter is expected to be around zero.

The comments of Federal Reserve chairman Alan Greenspan that the risks of continued weakness in the US economy are still high has not helped matters, and raises the possibilities of further cuts in interest rates.

'The period of sub-par economic performance is not yet over,' he warned. 'We are not free of the risk that economic weakness will be greater than currently anticipated.' He added that further weakness in the US economy could well result from 'softer demand abroad as well as from domestic developments'.

Despite his claims that the economy is 'fundamentally sound', the large surpluses and deficits that have built up over the past months will not go away overnight, and further interest rate cuts are inevitable if he is to turn the situation around and improve the state of the economy quickly.

The problems facing the global economy are being reflected in the financial results being reported by the world's chemical companies. Many are announcing swingeing cutbacks and substantial job losses in an attempt to reduce overheads and improve the bottom line to keep shareholders happy in the face of poor profit margins. Both Bayer and BASF have issued profits warning in the first-half of this year, and neither is on target to attain the returns they were hoping for from the full year.

BASF's chairman, Juergen Strube, said that his company would only be able to achieve its financial goal of increasing income by an average of 10% p.a. from 2000;2002 through 'extraordinary efforts'. He said, 'A significant economic upturn in the majority of OECD countries by no later than the turn of the year will be necessary [if we are to achieve it].' This looks highly unlikely.

The recent further cuts in interest rates in the UK have been welcomed by the Chemical Industries Association, with a warning that further action will be necessary if the severity of the problems facing manufacturing, and the chemical industry in particular, are to be alleviated. The CIA's director general, Elliot Finer, explained, 'Industry's difficulties are further exacerbated by the continuing uncompetitive level of sterling against the euro, and the burden of environmental tax and regulation. We believe that there is significant scope for the banks to lower interest rates further without a threat of inflation.'

The European chemical industries council, CEFIC, is now estimating that overall output growth for the European chemical industry will slow from 3.6% last year to around 2% in 2001, and predictions for both stock levels and production expectations are rather less than favourable.

On the plus side, a recovery is predicted for 2002, with the American Chemical Council expecting US economic growth to rise to 3.3% in 2002, presumably kick-started by Greenspan's expected interest rate cuts. However, economic predictions are notoriously unreliable, and only time will tell whether this time next year an up turn in production and a rise in business confidence will be a reality.