By: Frank Esposito
April 11, 2014
“Russia is the wild card. That shouldn’t affect the U.S. very much, but Russia may pay a steep economic price.”
Behravesh cited two headwinds that could be a challenge to the U.S. economy in 2014. The first was private sector deleveraging as a result of too much debt. The second was fiscal austerity. He estimated that those two factors cut U.S. GDP growth in half last year, reducing what should have been 3 percent growth to 1.5 percent.
Tailwinds that could help global markets include the unconventional oil and gas boom — including shale gas in the U.S. — as well as quantitative easing through bond buying by the U.S. Federal Reserve.
First quarter U.S. GDP growth should be relatively weak at 1.5 percent, Behravesh said, due in part to the effect of severe winter weather on commercial activity across the country. Underlying growth is 2.5 to 3 percent, with second quarter growth expected to clock in at 3 percent. Full-year 2014 U.S. GDP growth is expected to be 3 to 3.25 percent, according to Behravesh.
Things also are looking up in Europe, where after two years of negative growth, the region’s GDP is set to grow by 1 percent in 2014. Confidence there is up, Behravesh said, even if the region’s monetary policy is not as accommodating as it is in the U.S.
Europe also is more vulnerable to the Russian situation, since French banks hold Russian debt, and Germany’s automakers and Italy’s producers of luxury goods have many customers in Russia. Europe also still buys about 30 percent of its natural gas needs from Russia.
In the emerging world of Brazil, Russia, India and China — the so-called BRIC nations — Behravesh said that “the party is over.”
“We saw a flight of capital [from the BRIC countries] when the U.S. announced it would taper its bond purchases,” he said. “Those countries enjoyed cheap credit, a commodity supercycle and hyperglobalization — but all three of those factors have leveled off.”
Behravesh also sees more pessimism in China, where he said “there’s not a meltdown — but an accident waiting to happen.” China’s annual GDP growth goal of 7.5 percent will be tough to meet in 2014 without extra government stimulus.
For Chinese economic risks, he listed “an explosion of debt” to 220 percent of national GDP, off-balance sheet “shadow banking systems” that can conceal the amount of bad loans and a lot of debt being used for unproductive activity. This activity includes state-owned entities and local governments speculating in real estate and infrastructure, resulting in excessive capital investment in areas such as chemicals, steel and aluminum.
“As growth slows, China can either react with tough love and live with lower growth, or kick the can down the road, which is what I think will happen,” Behravesh said. “They’ll provide more stimulus, but the debt will get worse. There won’t be a hard landing, but risks will increase.”
For Russia, Behravesh said he doesn’t know how that country’s aggressive annexation of the Crimea will play out, but he said government action there already reduced GDP growth to 1.3 percent last year and could send Russia into recession in 2014.
In the energy field, IHS downstream research and consulting vice president Bill Sanderson said that global consumption increased in 2013 after being negative in 2011-12. The increase was due in part to North American refined product demand.
As U.S. crude oil supplies grow — and “tight oil” production increases, what happens in North America is affecting the world, according to Sanderson. He added that he expects global oil prices to moderate slightly but to remain in a trading range near $100 per barrel through 2015.
“There are too many security issues for the [oil] price to fall,” Sanderson said.
U.S. natural gas production also is set to increase with 2020, with “big growth” coming from shale gas. National production of 55 billion cubic feet per day is expected to reach 75 billion by 2020, with increased production set to keep prices low, remaining around $4.
Global basic chemicals and plastics demand grew 3.8 percent in 2013, according to chemicals senior vice president Dave Witte. That’s 1.2 times the rate of global GDP growth, with about half of that growth coming from China.
New capacity for those materials coming online in 2010-20 favors demand centers and low-cost producers. The decade will feature capacity additions in North America and China and reductions in Western Europe.
Shale gas will have served to cut U.S. natural gas prices in half from 2005-15, Witte said. Additional natural gas output also has led U.S. electricity costs to fall by one-third and for the region’s ethylene cash costs to fall by about 40 percent.
Shale also dramatically impacts global profit distribution, he added, with North America accounting for an increased share of global chemicals and plastics profits with growing production.
Reshoring manufacturing work to North America from China also has created a new dynamic for the industry. It’s been caused by more than rising labor costs, Witte said, but also by fuel and shipping costs and quality concerns. Other locations such as the Philippines, Indonesia and Vietnam have benefited from these issues.
Reshoring will have the greatest impact in the automotive, electronics and appliance markets — but Witte cautioned that it will happen at a slower pace than offshoring did originally. Eventually, however, reshoring will add as much as 1 percent to North American petrochemical demand growth, he said.