Horrible’. This is how Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics, has described the fourth quarter of 2018 for the Eurozone’s manufacturing industry.
Felix Huefner, Senior European Economist and Chief German Economist at UBS noted that ‘[the] weakness is no longer confined to the car sector, but it’s getting broader.’
The manufacturing industry has perhaps long been the most important one in Europe, generating 14% of the continent’s GDP. From automobiles to food, it is Europe’s manufacturing capacity that supports and drives a large number of businesses across the Eurozone, whilst also making the continent an attractive trading partner for other markets such as the US and China.
However, recent numbers have revealed that Europe’s manufacturing industry is in real trouble, and is shrinking at its fastest rate in six years.
The IHS Markit Purchasing Managers’ Index (PMI), a key economic indicator for the manufacturing industry, hit its lowest point since 2013 in March this year, marking a fall down to 44.5. If you’re wondering what this really means, the answer is simple: a reading of between 50 and 55 shows that the sector is balancing near the line of recession, while any reading below 50 indicates an actively shrinking industry.
According to the survey, Germany’s manufacturing PMI was finalised at an 80-month low with 44.1, Italy reached a 69-month low with 57.5 and Spain hit a 63-month low with 49.9. France has shown a slight improvement, but the overall growth remained historically weak with the manufacturing PMI increasing to just 51.5 in February, from 51.2 in January.
Chris Williamson, Chief Business Economist at IHS Markit, which compiled the Index, commented on the results saying that, ‘With factory order books deteriorating at an increased rate, the rate of contraction in the goods-producing sector will likely worsen in coming months.’
With Germany, France and Italy taking the front row with the most dramatic declines, multiple economists around the world say that it looks as though Europe is heading into recession.
Analysts at both the Institute of International Finance (IIF) and Oxford Economics have come to the same conclusion regarding the big question of ‘why did it happen in the first place?’, highlighting that the dramatic drop in the manufacturing industry is actively connected to one core political choice made by EU governments in recent years: austerity.
Governments efforts to reduce the deficit spending, to cut the fiscal stimulus and to balance their budgets in the 10-year aftermath of the 2008 financial crisis has shrunk the potential size of the European economy and seriously damaged its ability to grow again.
But wait, there’s more!Oxford Economics analyst Rosie Colthorpe says that “since 2008, Europe has lost economic activity equivalent to Spain’s entire GDP. By making its economy smaller, Europe has become less able to handle its debts.”
IHS Markit noted that there are a number of reasons behind such a dramatic fall, including uncertainty over Britain’s exit from the European Union, as well as concerns over the global trade slowdown and tariffs war with China. Chris Williamson commented on this, saying that ‘the downturn is being led by Germany and Italy, but Spain has also now fallen into contraction and only modest expansions are being seen in France, Austria and the Netherlands. In addition to widespread trade war worries – often linked to US tariffs – and concerns regarding the outlook for the global economy, companies report that heightened political uncertainty, including Brexit, is hitting demand and driving increased risk aversion.’
Talking about the future of the EU’s manufacturing sector, the latest data from the Manufacturing Industry Output (MIO) Tracker predicts that the manufacturing economy will grow by just 0.7% in 2019, compared to the 2.5% that was projected in May 2018.
So faced with the biggest questions right now – can the European manufacturing industry recover, and how – experts tend to have different opinions. Nick Andrews, Senior Analyst at Gavekal Capital, says that Europe has no control over its future anymore, whilst Paul Miller, Senior Analyst at Forrester Research, believes that the future of Europe’s manufacturing industry relies on large-scale changes in terms of both skill sets and industry structure, for which governments, employers and employees all share responsibility.
What is clear is that EU policymakers need to find a new, effective approach to control a situation that seems to be worsening every month, and experts say that in order to stabilise the manufacturing industry, officials in Brussels have to focus on developing a clear plan to counter the challenges posed by weaker international trade, a possible ‘no-deal Brexit’, and structural woes in the Eurozone’s financial sector.