While no turnaround is expected in the immediate future, there are some green shoots visible for eurozone industry in 2025. However structural factors are weighing on the manufacturing sector, which will limit the scope of any rebound.
Photo: Dreamstime.
Industrial production continues to contract
There is no sugarcoating it. European industry is going through a deep correction, and it does not look like the end is here yet. Since mid-2022, industrial production has been in steady decline. This represents the strongest downturn in production in more than 30 years without the eurozone economy entering a recession. A strong service sector is keeping the economy afloat, while the manufacturing sector is shrinking.
There is little light at the end of the tunnel right now. Looking at recent data, experts hardly find any evidence that a rebound is imminent. Inventories built up during times of high demand and supply-chain disruptions have barely come down. And new orders are not yet picking up, with demand both from within the eurozone and without remaining weak.
This is the strongest downturn in eurozone manufacturing without recession since 1991
Table: ING.
Multiple drivers cause weakness in manufacturing
The perfect storm for manufacturing has multiple drivers. Over the past few years, analysts have seen that supply-side problems have faded and that (the lack of) demand has quickly become the largest worry for European manufacturers (see chart below).
Going through the drivers of weakness, they find that consumer demand for goods remains sluggish due to the real income shock that Europeans experienced when inflation surged. And the economy seems to be stuck in a weak growth environment, which limits the outlook for consumer demand despite a decent recovery in real wages.
Furthermore, weak fixed investment plans are impacting manufacturing significantly. In the eurozone, investment is well below its pre-pandemic trend. This is due to weak domestic demand as well as high interest rates after years of negative rates. And policy uncertainty plays a major role, too.
More structurally perhaps, the energy shock is still keeping energy-intensive production muted, while weak demand outside of the eurozone – think of China for example – is impacting new orders in the manufacturing sector. Chinese export growth to the eurozone, meanwhile, is a sign of additional competition for local producers.
Finally, geopolitical tensions in the Middle East have contributed to longer-than-expected disruption in shipping. As a result, input costs for producers have started to increase again. This makes production more challenging in a weak demand environment in the eurozone.
This is not a global problem, it's just us…
The eurozone is quite alone in this. Other major economies are not experiencing a similar downturn. Looking at China and the US for example, analysts see that the US has experienced flatlining production over the past 18 months, while China saw production grow by about 6%. The eurozone saw production decline by a similar amount. With weak domestic demand in China, it is no surprise that exports surged by 15% over the same period. For the eurozone, exports contracted by close to 5%. So, China has been able to mask weak domestic demand by producing for the rest of the world, which has gained a lot of attention recently as Western economies struggle with China's excess capacity.
Germany is most often described as the sick man of Europe in terms of manufacturing. But the reality is that while Germany may have experienced a larger contraction in industrial production than most other markets, there are very few shining lights within the eurozone. None of the major eurozone economies now produce more than at the start of 2023. France has performed best but is down 0.4%, while Germany has experienced a downturn of 8.4% based on comparable data from Eurostat.
More information:
ING
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