posted on 06.26.14

European Industrial Outlook: Variable Speeds of Growth

Need to Know . . .

• MAPI forecasts manufacturing production to advance 2% in the Eurozone and 5.5% in the CEE3 (Czech Republic, Hungary, and Poland) this year and 2.6% and 5.4%, respectively, in 2015.
• A boost to fixed investment slated for 2014 will be offset by feeble consumption growth and faltering net exports.
• The May election to the European Parliament voted in a large caucus of Eurosceptic lawmakers, likely complicating the transatlantic agenda on trade.

Summary of Findings and Forecasts

• Economic growth in Europe is stuttering again, although the manufacturing sector is showing signs of strength. Fiscal austerity clearly weighs on overall spending and private demand continues to suffer from consumer malaise.
• A look forward reveals only marginal improvement in Europe’s manufacturing production forecast for 2015 compared with this year. A boost to fixed investment slated for 2014 will be offset by feeble consumption growth and faltering net exports.
• MAPI forecasts manufacturing production to advance 2% in the Eurozone and 5.5% in the CEE3 (Czech Republic, Hungary, and Poland) this year and 2.6% and 5.4%, respectively, in 2015.
• GDP is slated to advance 1.1% in the Eurozone and 2.4% in the CEE3 this year and 1.4% and 2.9%, respectively, in 2015.
• Consumers are keeping purse strings tight even in countries with expanding income, such Poland, the UK, and Sweden. Uncertainty over policy, including at the EU level, hangs over the overall sentiment.
• The May election to the European Parliament voted in a large caucus of Eurosceptic lawmakers. For U.S. stakeholders, such as MAPI members, the new parliament will likely complicate large legislative initiatives on the docket, such as the banking union and TTIP negotiations.
• Buoyant cyclical expansion in Germany is pulling demand for intermediate products made in the Czech Republic. Output of manufactured goods such as wood, refined petroleum, rubber and plastics, and fabricated products is particularly strong.
• Overall economic growth will reach only 2% in 2015 in Germany—respectable by European standards but well short of past performance. A higher minimum wage, rising immigration, and a steady influx of women into the labor force are boosting prospects for growth beyond next year.
• Spanish growth is picking up speed as structural reforms imposed by the IMF are beginning to bear fruit. Productivity growth has eased the way toward moderate pay raises. Exports are also on the way up. The country registered three consecutive quarters of growth up to the first quarter of 2014.
• The French industrial sector emerges as one of the weakest among key European economies moving into the recovery phase. High labor costs combined with lagging productivity have sapped the competitiveness of French industrial firms compared with their peers. Domestic demand remains feeble amid high unemployment and steady creep of public austerity.
• Sweden’s expansion is faltering. GDP unexpectedly dipped in the first quarter while manufacturing output declined in 9 of the last 12 quarters. Despite persistently high unemployment, consumption spending keeps powering on, signaling improving sentiment ahead.

Cyclical Overview
Economic growth in Europe is stuttering again, although the manufacturing sector is showing signs of strength. Since early 2011, quarterly GDP growth in the Eurozone has not exceeded 0.3% once; it grew just 0.8% over the last four quarters. Fiscal austerity clearly weighs on overall spending and private demand continues to suffer from consumer malaise.

Compounding the weakness is deepening regional disparities in economic performance. Italy, Finland, and the Netherlands languish in effective recessions while Poland, Germany, and the UK power ahead amid improving fiscal balances and rising consumer confidence. This will inevitably create tensions, particularly within the Eurozone, where a common rulebook on monetary policy and fiscal guidance has to underpin policymaking.

Domestic demand remains feeble. Signs accumulate that fixed investment is slowly perking up but inventory swings pull down the overall pace of capital formation. Consumers are keeping purse strings tight even in countries with expanding income, such as Poland, the UK, and Sweden. Uncertainty over policy, including at the EU level, hangs over the overall sentiment. Overall GDP rose 0.3% in the entire EU in the first quarter and 0.2% in the Eurozone—both below expectations.

On the other hand, manufacturing production rose in each of the past five months and is running just over 3% over the level of a year ago in the EU and just under 3% in the Eurozone. As Figure 1 shows, only parts of Scandinavia’s industrial sector remain in recession. The core central European four (Czech Republic, Hungary, Poland, and Slovakia) plus Romania boast annual growth rates of around 8% or better.

Figure 1 – Manufacturing Production in Q1 2014

Source(s): Eurostat and MAPI

MAPI forecasts manufacturing production to advance 2% in the Eurozone and 5.5% in the CEE3 (Czech Republic, Hungary, and Poland) this year and 2.6% and 5.4%, respectively, in 2015. GDP is slated to advance 1.1% in the Eurozone and 2.4% in the CEE3 this year and 1.4% and 2.9%, respectively, in 2015.

A look forward reveals only marginal improvement in Europe’s manufacturing production forecast for 2015 compared with this year. A boost to fixed investment slated for 2014 will be offset by feeble consumption growth and faltering net exports (Table 1). Public expenditures will put an additional drag on demand. The CEE3 and Sweden will boast manufacturing growth rates of 4.5% or more while Germany and Austria should expand at a rate of about 3% each. Downside risks include a possible disruption of gas deliveries resulting from political tensions between Russia and Ukraine as well as an unexpected panic around Europe’s still fragile financial system.

Table 1 – Industrial Production Growth Rates and Forecast

F=Forecast
Source(s): Eurostat and World Bank and MAPI

Europeans voted overwhelmingly for the moderately conservative European People’s Party (EPP) and the moderately left-of-center Socialists and Democrats (S&D) in the May election for the European Parliament (EP). The big change lay in voters preferring new Eurosceptic national parties over the traditional liberal (free market), green, far left, and conservative and reformist candidates. As many as 30% of the members of the European Parliament could be labeled as Eurosceptic although in reality, only 20-25% of them might agree to promote consistently anti-integration policies.

For U.S. stakeholders, such as MAPI members, the new parliament will likely complicate large legislative initiatives on the docket. Among them is the “banking union,” or an attempt to ring-fence external effects of domestic banking crises. Joint supervision and resolution mechanisms have already been diluted under pressure from domestic constituencies. The new parliament may try to further “nationalize” this pan-national jurisdiction.

Perhaps the greatest victim of the vote might be the Transatlantic Trade and Investment Partnership (TTIP). Even without the impact of the new Eurosceptic vote, traditional pro-American political forces might be more circumspect to support the treaty. Given the EP’s rising scrutiny of Commission-initiated proposals, the timetable for the treaty’s conclusion is likely to shift much further into the future.

Industries in the Current Business Cycle
In Figures 2 and 3, industrial sectors are positioned along a cyclical path divided between phases of growth and decline. Central Europe is made up of the Czech Republic, Hungary, and Poland. Most industrial sectors in the Eurozone have emerged from recession and are in various phases of recovery. Central European manufacturing is growing faster still, with wood, rubber, plastics, nonmetallics, and motor vehicles sectors registering double-digit growth rates.

Figure 2 – Eurozone Industrial Sector by Phase of Cycle, March 2014

Source(s): Eurostat and MAPI

Figure 3 – Central Europe Industrial Sector by Phase of Cycle, March 2014

Source(s): Eurostat and MAPI

Regional Analysis

Figure 4 – Belgium: Manufacturing Production and Unemployment

Source(s): Eurostat and MAPI

Belgium (Figure 4)

• The economic outlook has improved since our last report. Corporate investment will grow some 2.5% in 2015 although consumer demand is bound to disappoint on account of faltering employment demand and hence wages.
• The country’s manufacturing sector rebounded smartly in the second half of last year and the sector is expanding at a 3% clip. Housing sector reform may put a damper on residential investment and real estate prices.
• Intermediate goods, such wood, paper, and chemicals are performing better than durable goods, such as machinery and motor vehicles.

Figure 5 – Czech Republic: Manufacturing Production and Unemployment

Source(s): Eurostat and MAPI

Czech Republic (Figure 5)

• The Czech economy will expand 2.5% in all of 2015 on the back of a strong pickup in capital formation. This has caused us to revise upward our manufacturing forecast.
• Buoyant cyclical expansion in Germany is pulling demand for intermediate products made in the Czech Republic. Output of manufactured goods such as wood, refined petroleum, rubber, plastics, and fabricated products is particularly strong.
• Intervention in the foreign exchange market has weakened the koruna, which in turn is beginning to push up prices. Inflation has been exceptionally low, so rising prices should allow for a return to a floating currency regime.

Figure 6 – Germany: Manufacturing Production and Unemployment

Source(s): Eurostat and MAPI

Germany (Figure 6)

• Overall economic growth will reach only 2% in 2015 in Germany—respectable by European standards but well short of past performance. A higher minimum wage, rising immigration, and a steady influx of women into the labor force are boosting prospects for growth beyond next year.
• Manufacturing production has rebounded and is running upward of 4% at an annual rate. Private consumption is boosted by rising income and wealth on the back of a housing surge.
• The manufacturing boom is broadly based. Durable goods perform particularly well, with some expanding by double digits, such as electronics and optics. Output of intermediate goods went up 5% since the beginning of 2013.

Figure 7 – Spain: Manufacturing Production and Unemployment

Source(s): Eurostat and MAPI

Spain (Figure 7)

• Spanish growth is picking up speed as structural reforms imposed by the IMF are beginning to bear fruit. Productivity growth has eased the way toward moderate pay raises. Exports are also on the way up. The country registered three consecutive quarters of growth up to the first quarter of 2014.
• Amid returning business confidence and falling interest rates, the labor market has stabilized and demand for labor is perking up. Growth is driven largely by capital formation and net exports.
• Spain will linger near the bottom of the manufacturing growth rankings over the next 1.5 years. The recovery is broadly based albeit muted overall. Pockets of particular strength include electronics and selected types of specialized machinery.

Figure 8 – France: Manufacturing Production and Unemployment

Source(s): Eurostat and MAPI

France (Figure 8)

• The French industrial sector emerges as one of the weakest among key European economies moving into the recovery phase. High labor costs combined with lagging productivity have sapped the competitiveness of French industrial firms compared with their peers. Domestic demand remains feeble amid high unemployment and steady creep of public austerity.
• Despite still rising unit labor costs, disposable income and consumer spending have been largely supporting domestic demand. Lower employer charges on wages, to be introduced soon, should stimulate investment. On the other hand, falling public expenditures are bound to take a bite out of aggregate demand leading up to 2015.
• Rising production of intermediate products heralds a gradual strengthening of demand for capital goods. We have seen buoyant expansion of foodstuffs, rubber, and plastics; machinery output, however, continues to languish.

Figure 9 – Italy: Manufacturing Production and Unemployment

Source(s): Eurostat and MAPI

Italy (Figure 9)

• Italy’s recovery remains tepid. Investment spending is benefiting from a sharp fall in the cost of borrowing. On the other hand, consumers are staying cautious in the midst of rising joblessness and political impasse.
• Employment is sagging and wage awards have been muted. Both have contributed mightily to another fall in the growth of GDP, this time in the first quarter of this year. Tax cuts planned for this year might release some additional purchasing power but lagging productivity performance is likely to stymie competitiveness in the short run.
• Manufacturing output is on the way up again, although at about a 0.7% annual rate, the pace is one of the slowest among key industrial economies of the region. Durable goods, such as basic and fabricated metals as well as motor vehicles, are performing particularly well.

Figure 10 – Hungary: Manufacturing Production and Unemployment

Source(s): Eurostat and MAPI

Hungary (Figure 10)

• The Hungarian recovery will take a short breather next year. Expanded public spending has generated demand for workers, boosting employment, pay, and overall spending. Business sentiment struggles to recover lost ground, however, putting the brakes on investment despite low inflation and rising capacity usage.
• The recovery might run out of steam because the temporary fiscal boost will eventually be withdrawn; business spending is unlikely to compensate for this factor.
• Industrial output rose sharply in the first quarter, spurred by foreign demand for intermediate and capital goods. Domestic demand remains subdued. Strongly performing sectors include chemicals, nonmetallics, and basic metals.

Figure 11 – Netherlands: Manufacturing Production and Unemployment

Source(s): Eurostat and MAPI

Netherlands (Figure 11)

• GDP growth slumped badly in the first quarter in the Netherlands, pulled down by fixed capital spending. Measures to restrict mortgage interest deductibility negatively affected consumer sentiment, contributing to the 1.4% decline.
• At about 7%, the country’s jobless rate has rarely been higher. Combined with falling real estate prices, meager wage growth is putting a damper on domestic spending.
• The manufacturing sector remains in the doldrums. Very few industries show rising production, with chemicals and foodstuffs about the only exceptions.

Figure 12 – Austria: Manufacturing Production and Unemployment

Source(s): Eurostat and MAPI

Austria (Figure 12)

• The Austrian recovery proceeds at a moderate but steady pace. GDP gained about a percentage point in total over the past three quarters and the economy should grow about 1.5% this year and expand slightly faster in 2015.
• Exports have accounted for the brunt of the recovery thus far. Both residential and nonresidential investment have already begun to boost spending, shifting the composition of growth.
• The industrial side of the economy is taking off only now. Production of chemicals, pharmaceuticals, and motor vehicles is trending upward but nowhere near double digits. Expect total output to inch up to just under 3% this year and a bit more than that in 2015.

Figure 13 – Poland: Manufacturing Production and Unemployment

Source(s): Eurostat and MAPI

Poland (Figure 13)

• Poland’s expansion is gathering pace. Overall growth is broadly balanced, with a renewed boost provided by net exports. Nonetheless, growth in consumer spending decelerated somewhat last year despite accommodative monetary policy and rising wages.
• Poland is significantly exposed to the turmoil in Ukraine. Both trade and investment links to Russia and Ukraine itself are vast. Business sentiment could suffer should tensions escalate and sanctions be imposed.
• Manufacturing is seeing strong growth. At a predicted annual growth rate of about 6% this year and next, the country will place near the top of the EU’s league tables. Both intermediate and capital goods production feature strong expansion with output of consumer products just a tad slower.

Figure 14 – Sweden: Manufacturing Production and Unemployment

Source(s): Eurostat and MAPI

Sweden (Figure 14)

• Sweden’s expansion is faltering. GDP unexpectedly dipped in the first quarter while manufacturing output declined in 9 of the last 12 quarters. Despite persistently high unemployment, consumption spending keeps powering on, signaling improving sentiment ahead.
• A sharp rebound in capital formation is forecast for this year and next, spurred by very accommodative monetary policy. The withdrawal of fiscal stimulus is proceeding very gradually and should not subtract from growth.
• The industrial sector remains in the doldrums—the housing market provides the one bright spot. Buoyant real estate prices spur residential investment, benefiting wood products and selected nonmetallics related to construction.

Figure 15 – UK: Manufacturing Production and Unemployment

Source(s): Eurostat and MAPI

United Kingdom (Figure 15)

• The British economy has emerged as one of the more faster growing in the region. Growth is broad-based and benefits from renewed bank-lending, falling joblessness, and strong demand for residential construction.
• Nonresidential investment played second fiddle in the recovery despite an easy monetary stance. This will change soon, as rising capacity usage and a robust pool of retained earnings boost capital formation this year and next. On the other hand, foreign demand will contribute little in view of the strong pound sterling and weak growth elsewhere in Europe.
• Manufacturing production has been rising smartly over the past year and will increase almost 3% in 2014. Nondurables lead the way, with chemicals, plastics, rubber, and fabricated metals spurred by demand from construction activity.

Article provided in partnership with the Manufacturers Alliance for Productivity and Innovation.