Stronger economy expected for developing nations

The plastics processors, resins suppliers and machinery manufacturers that do business in developing nations will encounter better market conditions in 2017 than they have had during the past couple of years.

By definition, developing economies tend to experience volatile business cycles, so timing your investment is critical. The leading indicators are currently progressing through the early-recovery phase of the business cycle, so 2017 may be an auspicious time to initiate your investment strategies in the emerging market countries.

This forecast is based on expectations of continued gradual improvement in global market demand, particularly from the advanced economies of the U.S. and Europe. The growth in the advanced economies will proceed at a moderate rate by historical standards, but it will be sufficient to stimulate demand for industrial and energy-related commodities. This incremental rise in market demand will halt, and possibly even reverse, the downtrend in the prices for these commodities, and it will allow the countries that rely on these commodities to rebalance their production and inventory levels. These are the conditions that define the early-recovery stage of the commodities-investment cycle.

The steady growth in global demand should also be sufficient to stabilize the ongoing transition in China from an export-driven economy to one that is based on domestic consumption of both goods and services. The economic growth rate in China has decelerated in recent years, and in the first half of 2016, there were fears that a hard-landing was imminent.

A serious economic slowdown in China would not only affect Chinese demand for manufactured goods from Europe, but also it would be a big problem for the developing nations that have a large exposure to Chinese demand for commodities.

For the near-term, it appears that these fears have been allayed, and the best description of the deceleration in Chinese GDP growth is “soft-patch” rather than “hard landing.” However, it must still be acknowledged that the transition in the Chinese economy may hit a few bumps in the coming years.

In the near-term, the Chinese government has provided enough stimulus to ensure economic growth of greater than 6 percent in 2017. After that, it remains to be seen if the government's allocation (or misallocation) of resources will result in a smooth process of transition and stable growth over the medium and long term.

For most other regions in Asia, economic growth will remain solid if not downright robust. India's GDP is expected to register the strongest growth of all the world's major economies in the coming year. Our forecast calls for India's GDP to expand by at least 7 percent in 2017, which will continue the trend of strong growth. India's government introduced important tax reforms and other policy actions in recent years. These have raised confidence levels for both consumers and businesses. The result will be increased consumer demand and private sector investment.

The continued, albeit gradual, rise in demand for commodities and consumer goods in the world's largest export markets will generate accelerating growth in the economies of Southeast Asia (denoted on the table as the ASEAN-5) in 2017. As a result of increased investment in these countries during the past few years, their economies are presently enjoying a period of steady productivity gains and vigorous economic growth. There is little to suggest that this trend will not continue for the next few years.

After two years of steep recession, the forecast for the Brazilian economy calls for stability in 2017. I do not expect the economy to grow next year, and for most of the country, it will likely feel as if they are still in a recession. But for plastics manufacturers who are looking to invest in Brazil, it appears as if the worst of the cyclical downtrend is over. A wait-and-see strategy may be prudent for some, but 2017 will likely offer many opportunities to others to invest in Brazil at highly favorable terms.

The outlook for the Mexican economy calls for steady-to-better market conditions for 2017.

Export demand for Mexican products was noticeably weaker in 2016 than it was the prior year, but a steady acceleration in exports to the U.S. should prevail in 2017 and beyond. The biggest impediment to a faster recovery for the Mexican industrial sector is a need for infrastructure upgrades and other types of structural reforms necessary to support a more rapid expansion of its industrial capacity.

Under current conditions, an annual growth rate of 2.5 percent in its GDP is about all that can be expected in terms of long-term economic growth. Recent fiscal reforms will help to attract the necessary investment, but it will take a few years for this process to produce more rapid growth in industrial capacity.

One of the most intriguing regions in 2017 and beyond will be the emerging and developing countries in Europe. These countries have enjoyed a trend of solid economic growth in recent years, but the ongoing refugee crisis, recent terrorist attacks and the recent coup attempt in Turkey have created an environment of heightened uncertainty.

The forecast for this region assumes that most of these countries will continue to benefit from increased trade with their European neighbors, and also a continuation of the trend of rising popularity with tourists who are drawn to their cultural charms at reasonable prices. But it cannot be overlooked that many of these countries are currently exposed to the some of the world's biggest geopolitical and humanitarian crises.

These crises may represent a long-term benefit to these economies, and particularly the local plastics industry, because immigrants have historically provided a strong source of overall economic growth to the European economy. But the present situation may be a case of too much, too fast, and the immediate problems stemming from populism and nationalism may explode before the eventual benefits from immigration start to accrue.