VINACHEM

“The big picture remains unchanged.Four years after the recession officially ended, per capita output and incomehave yet to return to their pre-crisis highs. The recovery still ranks as theworst since World War II. And despite the modest acceleration in the past twoquarters, the recovery shows little sign of gaining momentum.”

The above isn’t a blog forecastabout the likely economic impact of the West’s transition to the NewNormal. It is instead the conclusion of Thursday’s main story in the Wall Street Journal, reporting that Q2 GDP grewjust 1.7%. The Journal also warned:

“There are some signs the overalleconomy’s acceleration could be short-lived. More than 24% of the quarter’sgrowth came from an increase in inventories—a buildup that is unlikely to berepeated and could even be erased in subsequent data revisions. Consumerspending, which has been the backbone of the recovery recently, grew at aslower pace in the second quarter, with Americans cutting spending on hotelsand restaurants—a possible indication families are pulling back ondiscretionary items. It is also possible federal-government agencies may makemore cuts in coming quarters.”

This is yet further confirmation ofthe way that the blog’s views on the economic outlook are now becomingmainstream consensus thinking. The pity is that the demographic rationalefor these developments is still not being properly discussed. Policymakers seem most unwilling to accept there can be no return to the SuperCycleperiod of constant growth. As a result, companies and the media continue to begiven the wrong outlook.

The chart above shows the mostlikely outlook for GDP growth and interest rates. It focuses on theaverage 5 year percentage growth in the critical Wealth Creator generation of25 – 54 year-olds (blue column) as the key dimension. When this cohort isgrowing fast, then interest rates (black line) and GDP (red) also increasequickly. When growth is the cohort slows, then growth and interest ratesalso slow.

The reason is obvious. Asustained surge in the number of Wealth Creators (as happened from 1971 as aresult of the 1946-64 US BabyBoom) means that demand starts to increase fasterthan supply. So interest rates need to rise, to allow the price mechanismto ration available supply. Then once growth in the number of WealthCreators starts to slow, supply begins to catch up with demand, and so interestrates can fall back to normal levels.

If President Obama decided to addthe blog to the shortlist to become the next Federal ReserveChairman, this is the one chart it would take to the interview. Unlikemost economic models, it has been accurate for the past 50 years. And itsability to continue to forecast the outlook depends only on knowing how many peoplewill be entering or leaving the 25 – 54 age group – something which isvery well understood.

Latest benchmark price movementssince the IeC Downturn Monitor launch on 29 April 2011, with ICIS pricingcomments below:

NaphthaEurope, down 20%. “Petrochemical demand for naphtha ishigher than a couple of weeks ago.”
PTAChina, down 17%. “Chinese domestic PTA prices were relatively softerthan import prices because of abundant supply and weak spot requirements fromend-users”
HDPEUSA export, down 15%. “Global demand is weak, with buyerspurchasing only as needed”
Brentcrude oil, down 13%.
BenzeneEurope, down 3%. ”Prices in July reached a yearly low onample availability and weak derivative offtake
US$: yen,up 21%
S&P 500stock market index, up 25%