Uncertain times

It was almost a year ago to the day that the UK chemical industry was being told at the Chemical Industries Association Business Outlook Conference that in 12 months time it would definitely be feeling better. But this year Dr Ralf Gronych, chief economist at BASF, had no such words of reassurance for the audience. Today, he said, the outlook depends on geopolitical developments, and great uncertainties are clouding the economic situation.

The slight recovery seen in the second half of 2002 seems to have run out of steam, and even if there is no military action against Iraq, the prospects for 2003/04 should be viewed with only cautious optimism. If a military offensive is avoided – what Gronych called the base case scenario, the crisis in confidence will start to fade away, leading to a fragile recovery towards the end of the year.

This will be boosted by a European Central Bank interest rate cut and the introduction of a new 10-year fiscal package in the United States. And after a spike at the beginning of the year caused by the strike in Venezuela, oil prices will ease to around US$24/barrel, he predicted.

However, if an attack on Iraq goes ahead, and assuming that this is a rapid and successful military strike in the first quarter of the year, oil prices will settle at around $27 after a temporary drastic peak.

But there will be a slowing down in consumption, leading to a renewed stock market slide, and as in the Gulf war of 1990/91, the negative economic repercussions will be felt for at least the following two quarters.

To judge from the leading business indicators, said Gronych, some of the gloom has lifted from the US, and cautious optimism for 2003 is probably justified. In Europe, on the other hand, industrial growth is likely to continue sluggish or even to fall further. 'The worst doesn't seem to be over,' he said, 'and especially not in Germany.'

This 'feel bad' factor will continue in the EU for the next few months, with a slight improvement thereafter and a chance of a more lively upswing in 2004.

However, the pharmaceutical sector has shown a dynamic growth trend in recent years and this has tended to disguise the real situation in the chemicals sector, according to Gronych. If the pharma figure of 4.5-5% a year is excluded, growth in the remainder of the chemicals sector in Western Europe will show a slight decline in 2003, falling from 2.1% last year to 2.0%.