When it comes to delivering unpleasant news, it’s best to just get to it. Moving into the end of 2022, the global economy is struggling with slowing growth in several major economies around the world. Global GDP growth slows to 2.9% in 2022 and 2.1% in 2023. Europe is likely entering a recession triggered by historically high energy prices and demand destruction in the industrial sector. China’s recovery remains stifled amid continued zero-COVID policies and a property crisis that has eroded confidence and depressed demand for building materials. Emerging markets are struggling with higher costs for imported energy and food and higher interest rates on debt.
The unprecedented adjustment that was the theme of our outlook last year has continued to evolve (See: “2022 Chemicals Industry Outlook: Upward Momentum Builds”). Decades-high inflation rates, initially brought on by the pandemic-induced shift in spending on goods and fueled by fiscal stimulus, has been exacerbated by Russia’s invasion of Ukraine and the resulting disruptions to energy and food markets. In response, central banks in many major economies have begun raising interest rates in an effort to bring inflation under control. The sharp increase in borrowing costs is making consumption and investment more expensive.
The U.S. economy is also losing momentum and a mild recession is likely to begin in early 2023. U.S. GDP grew by 1.8% in 2022 and will be essentially unchanged in 2023 as a contraction in growth at the beginning of the year turns into recovery after mid-year. With inflation having peaked in the United States during Q3, growth in consumer prices averaged 8.1% in 2022. With continued gains in interest rates in the coming year, price growth slows to 4.2% in 2023 before returning to trend growth between 2-2.5% through 2026.
Consumer spending held up during 2022, in large part due to savings accumulated during the pandemic. Following an 8.3% gain in 2021, consumer spending grew by 2.6% in 2022. Having worked down this cushion of “excess savings” and experiencing the highest inflation in four decades, consumers are due for a retrenchment in spending. We expect consumer spending to rise by only 0.6% in 2023.
End-Use Markets
Interest-rate sensitive sectors of the economy (i.e., business investment) have slowed while housing has fallen sharply as affordability has been reduced by higher mortgage rates and higher building costs. Business investment slowed to 3.4% gain in 2022, but will be essentially unchanged in 2023, up by just 0.4%. Housing starts are expected to average 1.56 million in 2022, down from 1.60 million in 2021. Starts are expected to fall to 1.34 million in 2023, before recovering in 2024.
Sales of light vehicles have been hampered by an ongoing global shortage of semiconductors. Despite recent improvements in the availability of computer chips, assemblies have only just returned to pre-COVID levels. For the year, vehicle sales are expected to come in at just 13.8 million, the lowest level since 2011. Sales are expected to rise to 14.9 million in 2023, with chemistry-intensive electric vehicles accounting for a larger share of the market.
Growth in industrial production, which rebounded strongly in the first part of 2022, moderated in the final months of 2022. Severe supply-chain disruptions and shortages that characterized the first half of 2022 turned into a buildup of inventories across many supply chains going into the end of the year. Customers built inventories to mitigate disruptions and delayed deliveries finally arrived at the same time demand slowed. Industrial production rose 4.3% in 2022 but will fall by 0.5% in 2023.
Industry Outlook
Growth in U.S. chemical production also rebounded strongly at the beginning of the year, but growth has slowed in recent months with a deceleration in end-use markets and headwinds for U.S. exports from a higher dollar and lower global growth. With a strong start earlier in the year, we expect that output of U.S. chemicals grew by 3.9% in 2022, one of the best years over the past decade. In 2023, chemicals output is expected to fall 1.2%.
With a mild recession expected in 2023, growth in basic and specialty chemicals will moderate. Basic chemicals output is expected to fall by 1.5% in 2023 (led by declines in organic chemicals and synthetic materials) and specialty chemicals output will fall by 1.2%. In line with the rebound in end-use markets, growth in both basic and specialty chemicals reemerges in 2024.
As in many other supply chains, chemical manufacturers’ inventories were rebuilt during the year as many companies increased inventories of raw materials and products due to supply-chain problems. As demand started to ease during Q3, chemical inventories were high relative to shipments moving into the end of the year.
Despite slower growth, U.S. chemicals remain advantaged due to abundant domestic production of natural gas and natural gas liquids. According to the Energy Information Administration, U.S. production of natural gas surpassed its pre-COVID peak earlier in the year and the outlook is for further production gains through 2023.
Chemical industry payrolls continued to expand in 2022, with gains through the end of the year. Chemical industry employment surpassed pre-COVID levels in January and payrolls grew by more than 15,000 in 2022. With a decline expected in 2023, job growth will continue in 2024 and throughout the forecast horizon in 2026. Chemical workers continue to be among the highest-paid in the manufacturing sector—averaging more than $90,000 in 2021—and those earnings support local communities. (See: “2022 Survey Shows Strong Satisfaction.”)
Following a rebound in capital spending in 2021, momentum continued into 2022 with higher spending on capacity expansions, upgrades and sustainability projects. We expect that chemical industry capital spending grew 9.0% to $33.5 billion in 2022. With a downturn emerging in 2023, we predict growth in capital spending to slow to 3.3%.
Increasingly, investments in innovative lower-emissions technologies and advanced recycling will account for a growing share of capital spending budgets. Indeed, a recent survey of American Chemistry Council members indicated that, on average, a quarter of company’s capital budgets is allocated to sustainable manufacturing investments. As the world transitions to a low-carbon emissions future, the chemical industry is leading with investments in emissions-reducing technologies and solutions for its own production and for the broader economy. A growing number of chemical companies have stated goals, ambitions, or commitments to reduce GHG emissions. These technologies include carbon capture, utilization, and storage (CCUS), hydrogen and direct air capture, among others. The chemical industry is a leading supplier of innovative materials and technologies (e.g., battery materials, materials for renewable energy, energy-saving building materials, etc.) that will help other sectors of the economy achieve their GHG-reduction goals.
Global Perspective
In response to surging demand for goods around the world, global chemical output rose by 5.2% in 2021. Following the surge in 2021, which was fueled by the shift in consumer spending toward goods and generous fiscal stimulus, output of the global industrial sector moderated in 2022. Ongoing lockdowns in China, supply-chain bottlenecks and disruptions directly and indirectly caused by the Russian invasion of Ukraine curbed factory output around the world during the year. As a result, growth in global chemical output has also been lower. At the headline level, we project that global chemical output grew by 2.0% in 2022.
Looking ahead to 2023, global chemical production is expected to expand at a 2.9% pace as production in Western Europe edges higher from depressed levels and production in the Asia/Pacific region bounces back.
Beyond the downturn in 2023, we look for a continued recovery in the global economy and further expansion in demand for chemistry products. Sustained investment in U.S. chemistry will enable the industry to meet growing global demand and enhance sustainability through carbon reduction projects and advanced recycling and recovery.
The biggest risk to the outlook is persistent inflation and continued increases in interest rates that will prolong and deepen the coming downturn. Additional risks include an escalation in the war in Ukraine, the potential for conflicts to arise elsewhere in the world, financial instability and returning supply-chain disruptions.
