Chemical sector weakness unlikely to be sustained

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Chemical manufacturing took a turn for the worst in the second quarter but economic fundamentals suggest an improvement is on the way.‚Äč

The output of UK chemical manufacturing fell in the three months to June compared to the previous period for the first time in a year, and the drop was the largest in more than two years.

Output fell in four out of six sub-sectors. The biggest decline was in soap and detergents, cleaning and polishing preparations, perfumes and toilet preparations, which accounts for one-fifth of the UK’s total chemical manufacturing. There are signs that the main driver was a deterioration in exports, particularly to the euro zone. The sub-sector is largely consumer-facing and household finances benefited during the period from lower unemployment rates and stronger real wage growth. Of the top 10 destinations for UK chemical products, seven - Germany, Netherlands, Belgium, France, Ireland, Spain and Italy - are in the eurozone. Private consumption in the euro zone slowed in the three months to June. Fears about Greece leaving the eurozone reignited during the quarter, likely prompting consumers throughout the region to cut back their spending.

In contrast, the largest increase by sub-sector was in petrochemicals –derived from petroleum or natural gas – which account for around one-quarter of UK chemical manufacturing. The strength of petrochemicals highlights that low crude oil prices reduced input costs, enabling the sub-sector to produce more with less.

Chemicals

Economic fundamentals suggest the UK’s chemical sector should improve in 2016. We expect UK economic growth to remain firm next year, supporting domestic demand for chemicals.  Also, real GDP growth in the euro zone is forecast to pick up modestly next year, which should support demand somewhat. By sub-sector, oil prices are likely to rise but only gradually, suggesting petrochemicals will continue to outperform.

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