EPTDA’s bi-monthly Economic Outlook Reports set forth the latest economic developments and industry trends, creating the opportunity for EPTDA members to anticipate the impact that these might have on their business and local business environment.
WHILE EUROPE INDUSTRIAL PRODUCTION IS SLIPPING DEEPER INTO RECESSION AT PRESENT, LEADING INDICATORS SUGGEST THAT YOU SHOULD BE PREPARING FOR THE ONSET OF A RECOVERY TREND AROUND MID-2020.
Uncertainty lingers, evidenced by ongoing decline in the Europe Business Confidence Index, as the Brexit deadline is again delayed. Brexit negotiations, as well as ongoing trade negotiations on the global front, suggest general decline in the Europe Export Volume Index will likely persist during at least the near term. However, it is important not to let the pessimism of the moment influence your plans for the second half of 2020 and for 2021.
UNCERTAINTY ABOUNDS ON THE WORLD STAGE.
European businesses are on high alert as economic data generally deteriorates and uncertainty related to the US-China trade war, looming Brexit, and political changes in Italy accumulates. The automotive industry is struggling; annual Exports of Road Vehicles are down 3.7% from one year ago. Automotive producers face stricter carbon emission rules ahead, which could further hinder this critical industry. Annual average Europe Industrial Production has generally trended lower since an October 2018 peak and recently passed a new milestone, dipping 0.1% below the year-ago level. This signifies a transition to the next phase of the business cycle: Phase D, Recession. The European Central Bank is expected to respond with a stimulus package, but its economic arsenal is limited due to already low interest rates.
BUSINESS CYCLE DECLINE DURING THE REMAINDER OF THIS YEAR AND INTO THE FIRST HALF OF 2020
The state of Europe’s economy is especially varied at this juncture in the business cycle, with significant differences between regions and sectors. Divergent trends have arisen between Western and Eastern Europe as well as between Europe Consumer Nondurable and Durable Goods Production. The net result is stagnation for Europe Industrial Production in recent months. The annual average in April was up 0.5% year over year, but 0.3% below a tentative October 2018 peak. Movements in leading indicators such as the G7 Leading Indicator, the Europe Manufacturing Purchasing Managers Index, and the Europe M1 Money Supply suggest business cycle decline (slowing growth or recession) in Production will extend into early 2020; we expect a mild recession during this business cycle.
PLANNING, MONITORING, ADJUSTING, AND EXECUTING TACTICS TO ENDURE THIS CYCLICAL DOWNTURN IS CRUCIAL TO YOUR BUSINESS’ SUCCESS
Business cycle decline is evident in Europe Industrial Production; the February Europe Industrial Production annual average (latest data available) is down 0.4% from a tentative October 2018 peak. The most recent three months of Production were 0.8% below the same three months one year ago. This is an ITR Checking Point™ which indicates that descent in the annual growth rate will persist during at least the coming quarters. Additionally, leading indicators, such as the G7 Leading Indicator, the Europe Manufacturing Purchasing Managers Index, and the Europe Business Confidence Index, suggest the Production slide down the back side of the business cycle (slowing growth or recession) is likely to persist through at least the end of this year. This is in line with our outlook for Production rate-of-change descent into early 2020. We recommend keeping a close eye on your cash position and access to credit, so you can endure the mild recession comfortably.
SUCCESS REQUIRES CONSTANT ADAPTATION
Your performance in 2019 will depend on your own strategic initiatives as the economy turns downward. If you have been reading ITR Economics articles during the last year, you have gotten a head start on planning for the business-cycle decline taking root for 2019. We have been advising clients toward more conservative decisions in preparation for the year ahead: Avoid linear budgeting, build up cash balances, avoid overexpansion, and build up a backlog to keep yourself busy during decline. We stand by this advice. We also suggest that you use the slowdown later in the year to prepare for the next period of business-cycle rise, expected around mid-2020. This could mean training up employees, upgrading processes, developing new products, or planning a move into a new market.Most importantly, as decline becomes more pronounced, remember to lead with optimism to help motivate your team. Decline will be temporary, and rise will likely resume next year.
EUROPE INDUSTRIAL PRODUCTION CALLS FOR SLOWING GROWTH TO GIVE WAY TO MILD RECESSION IN THE SECOND HALF OF 2019.
The edition alerts EPTDA member companies will need to work harder and be more selective in 2019 to find opportunities. They will need to ask themselves what they can do – to set their business apart, to enter new markets or new audiences of prospective customers, or to increase efficiencies – so they can offset the effects of the slowing growth and subsequent mild recession ITR Economics expects for Europe Industrial Production. The second takeaway is that the members must operate their business more conservatively at this juncture in the business cycle, so that their business can endure the period of business-cycle decline and subsequently capitalize on opportunities as the bottom of the business cycle forms around mid-2020.
ANNUAL AVERAGE EUROPE INDUSTRIAL PRODUCTION IN AUGUST WAS AT THE HIGHEST POINT IN NEARLY A DECADE.
Annual average Europe Industrial Production in August was at the highest point in nearly a decade, only 0.7% below the record high set in 2008. Annual Industrial Production is expanding (up 2.9% from the prior year), but the pace of growth has edged down over the last four months, indicating a transition to the back side of the business cycle. Trends in historically reliable leading indicators, including the Europe Leading Indicator and the Europe Manufacturing Purchasing Managers Index (PMI), suggest that the recent downward movement in the annual growth rate is not simply volatility but rather denotes the start of a longer business-cycle declining trend (slowing growth or recession). Movements in the Indicator and the PMI suggest at least three more quarters of rate-of-change descent for Production.
ANNUAL AVERAGE INDUSTRIAL PRODUCTION IN EUROPE REACHED RECORD LEVELS.
Europe Industrial Production will rise, albeit at a slowing pace, through the remainder of 2018 before decline characterizes the majority of 2019. Downward movement in the Europe Leading Indicator and Europe Manufacturing Purchasing Managers Index rates-of-change corroborate our outlook for rate-of-change decline for Europe Industrial Production through at least early 2019. It is plausible that certain sectors of the economy will be able to avoid overt decline, but be prepared for less robust market conditions, such as slowing growth, nonetheless.
ANNUAL AVERAGE PRODUCTION WILL EXPAND THROUGH THE END OF THIS YEAR, BENEFITING EPTDA MEMBERS
Year-over-year growth in Europe’s machinery production markets is a positive sign for EPTDA members this year. However, Europe Industrial Production and Europe Machinery Production are nearing the top of the business cycle and mild decline is expected for both indicators by mid-2019. Signs of this upcoming trend are already evident in the Europe Leading Indicator and the Eurozone Composite Purchasing Managers Index, which are both below the year-ago level.
SLOWING GROWTH IN THE SECOND HALF OF 2018, MILD RECESSION ANTICIPATED FOR 2019
The European industrial economy is expanding at an accelerating pace. Average Europe Industrial Production during the 12 months through February was up 3.5% compared to last year. Expect Industrial Production to rise through 2018 before declining mildly during the majority of 2019.
Accelerating growth in several sectors of the European economy bodes well for EPTDA members in the near term. However, do not lose sight of on the upcoming slowing growth in Europe Industrial Production expected to characterize the second half of 2018 and the mild recession anticipated for 2019.
GROWTH OPPORTUNITIES THROUGHOUT EUROPE – EPTDA ECONOMIC OUTLOOK REPORT
The majority of the countries in the European countries have expanding economies. Europe Industrial Production during 2017 rose for the fourth consecutive year, increasing 3.2% compared to the 2016 level. Production is also growing at an accelerating pace year-over-year during 2018, but a transition to slowing growth is likely during the first half of this year and it is expected that the pace of growth will be moderate in 2018 compared to 2017. Both Eastern Europe Industrial Production and Western Europe Industrial Production are expanding, up 5.6% and 2.5% on a year-over-year basis, respectively.
Take advantage of the accelerating growth trends now but avoid linear budgeting. Use the upcoming period of slowing growth to assess which, if any, segments are no longer profitable and eliminate them.
RISE FOR THE EUROPEAN ECONOMY INTO AT LEAST THE SECOND HALF OF 2018 – EPTDA ECONOMIC OUTLOOK REPORT
Europe Gross Domestic Product (GDP) is up 2.0% from last year. The industrial and consumer sectors of the economy are expanding, providing upward momentum for Europe GDP.
Trends in both the Europe Leading Indicator and Europe Economic Sentiment Index suggest rise for the European economy into at least the second half of 2018. However, the trends in these leading indicators also suggest that slowing growth is likely to characterize the European economy during the second half of 2018. On the consumer side of the economy, Europe Retail Sales were up 4.0% compared to one year ago. Retail Sales transitioned to a tentative slowing growth trend in October, but further data is needed to confirm this trend.
ITR Economics suggests that you prepare for increasing activity in the overall European economy this year but beware of linear budgeting, as the economy is likely to transition to a decelerating growth trend by the second half of the year.
GREAT OPPORTUNITIES IN EUROPE WITH INDUSTRIAL AND CONSUMER SECTOR EXPANDING – EPTDA ECONOMIC OUTLOOK REPORT
The European industrial sector is expanding, offering opportunities for EPTDA members in a multitude of market segment.
In Western Europe, Germany’s Industrial Production (up 1.7%) is growing at a faster pace than UK’s Industrial Production (up 1.2%) and France’s Industrial Production (up 0.6%), while in Eastern Europe, Romania’s Industrial Production, up 6.4% during the 12 months through August compared to the August 2016 level, is contributing to the rise in Eastern Europe Industrial Production.
Poland’s Industrial Production during the 12 months through September rose 4.7% year over year.
Europe’s consumer sector is also expanding and the Europe machinery production is accelerating.
Look to the food industry as an area of opportunity during the coming quarters, as Europe Food Production is likely to expand through 2018 but take into account the decline in 2019 which will be brief and mild, but still holds the potential for risk.
RISING LEADING INDICATORS IN CONJUNCTION WITH INCREASING GLOBAL DEMAND SUGGEST 2017 WILL OFFER OPPORTUNITIES FOR EPTDA MEMBER BUSINESSES TO GROW.
Rising leading indicators in conjunction with increasing global demand suggest 2017 will offer opportunities for EPTDA member businesses to grow. However, be cautious of the recent trends of business cycle decline in UK Industrial Production and France Industrial Production. Eastern Europe is demonstrating more robust industrial sector growth versus Western Europe. A prosperous food and beverage industry in 2017 will provide opportunities for EPTDA members in this industry while the chemical industry struggles to compete against emerging markets. Rising commodity prices are suggestive of higher demand in industries heavily tied to commodities, although be aware that rising prices will impact input costs and your bottom line.
THE CONSUMER WILL BE THE ENGINE THAT DRIVES THE EUROPEAN ECONOMY IN 2017
Eastern Europe industrial production, up 3.4% year-over-year, is outpacing Western Europe industrial production, up 1.2% from the 2015 level. Consumers are driving economic growth in Europe. European manufacturing production during the 12 months through January is up 1.5% from the year-ago level. The European machinery industry is generally expanding thanks to a strong domestic and global economy. Mining was a driver of downward movement in Europe industrial production during 2016.
GROWTH IN EUROPE INDUSTRIAL PRODUCTION DURING LATE 2017
As the Europe and the global economy grow in the coming quarters, we expect the industrial segment to contribute once more to the overall growth of the economy. The overall industrial segment is expected to expand during at least the second half of 2017. The list of positive indicators that support higher levels of Europe industrial activity in 2017 is growing. Manufacturing Production will generally expand. Building Permits for Construction, both residential and non-residential, are expanding. Motor Vehicle Production is at a record-high level. The Retail Trade Index is also at a record-high level, and the consumer strength will contribute to a vast amount of segments in the Europe economy.
THE EUROPEAN INDUSTRIAL SECTOR IS EXPANDING, OFFERING OPPORTUNITIES FOR EPTDA MEMBERS IN A MULTITUDE OF MARKET SEGMENTS.
Western Europe industrial production is generally in a slower growth trend.On the other hand, Poland will be a bright spot in the European economy.Despite slowing wage growth, Europe retail sales are accelerating, up 3.3% year over year. The food industry seems to be an area of opportunity during the coming quarters, as Europe food production is likely to avoid recession through 2018, Europe machinery production is accelerating as well. Finally, please look out for growth opportunities in construction.Important to mention is also that the consumer will be the engine that drives growth in the European economy into 2018.
GROWTH OPPORTUNITIES FOR EPTDA MEMBERS IN A MULTITUDE OF MARKET SEGMENTS – EPTDA ECONOMIC OUTLOOK REPORT
As Europe and global economies grow in the coming quarters, we expect the industrial segment of the economy to contribute to overall growth in the economy. Europe Industrial Production is expected to expand into mid-2018. The list of positive indicators that support higher levels of Europe industrial activity in 2017 and into 2018 is growing. The Retail Trade Index is at a record-high level, and the consumer strength will contribute to growth in a number of segments within the Europe economy. Be prepared for growth in Europe Industrial Production into mid-2018 by making sure you have adequate capital and labour. However, be sure to plan for the pace of growth to slow in 2018 relative to 2017. Take advantage of relatively low interest rates and make investments to increase process efficiencies by upgrading machinery and equipment, but avoid the temptation to over-expand given the likelihood of business cycle decline in 2018 and 2019.