It is looking more and more likely that the global economy hit a peak in Q2 last year, and has since been slowing. Latest data on chemical production from the American Chemistry Council indicates a further slowdown so far this year, as the chart shows:
- Global production slowed to 2.8% in February from a 5% peak last April (black line)
- Asia and the Middle East have seen major falls – from 8% to 3% (purple) and 3.6% (blue) respectively
- W Europe has slid from 4% to 2.7% (light blue), and Central/Eastern Europe from 2.4% to 0.4% (orange)
- Only N America continues to show an improvement from 1% to 4.2% (green)
Some of the decline must be due to oil price movements. The major collapse at the end of Q4/early Q1 came as a complete surprise to those who don’t read the blog. Companies were therefore forced to follow the market, rather than being able to anticipate it – and destocked heavily as prices fell.
Now, of course, they are having to restock as we move into the strongest seasonal quarter of the year. Thus shortages are widespread and prices for some products are rocketing as a result.
The problem is that companies had chosen to assume that oil prices were always going to be $100/bbl. Many were totally unprepared for the volatility that was inevitable as the Great Unwinding of central bank policies began.
Companies are not alone, of course, in having been caught unprepared. In a candid interview yesterday, the Governor of the Bank of Canada told the Financial Times:
“The first quarter of 2015 will look atrocious, because the oil shock is a big deal for us,” he said, adding that capital expenditure could fall by as much as 10 per cent as a result of energy companies cutting back on investment.
He added that even though a lower oil price should increase domestic demand by boosting disposable income, the negative effects from the impact on the energy sector were widespread.
“In theory lower oil prices mean [putting] more money in consumers’ pockets, but . . . if an oil company cancels [an investment] project, laying off a worker, that guy will not have the money to buy a new pick-up truck. That spreads pretty quickly”.
As we move into Q2, prudent companies and investors will map out a range of potential Scenarios for the oil price – my own would be $30/bbl, $50/bbl and $70/bbl. They can then start to anticipate the different impacts of each of these Scenarios on their business.
Another quarter spent scrambling to catch up with market developments could well be bad news for profits, and for executives’ personal reputations.