Short-term Industrial Outlook

Transcription

1 Short-term Industrial Outlook April 2013 Highlights: The uncertainty about future economic activity in Europe is prevailing The EU industries producing food and drink and pharmaceuticals have reached pre-recession production levels or higher. Recent developments in other manufacturing industries indicate however that the rebound is still on hold. Growing global economic activity may help EU industries. Investments keep declining due to negative expectations of future developments. The short-term outlooks for metal-manufacturing industries are negative, which is confirmed by declining metal future prices. A positive sign is the decline of gold prices. ± Contradictory signals from business cycle indicators confirm the prevailing uncertainty. Total manufacturing, motor vehicles, metal products and machinery industries are still below their pre-crisis peak production level. The developments at the end of 2012 pushed them even further down from that level, indicating that the recovery is still far ahead. Pharmaceuticals continue to develop strongly while production in food and drink industries has remained constant at the pre-crisis production level which was reached almost two years ago, cf. Figure 1. Figure 1. Pharmaceuticals and food and drink industries are above pre-crisis levels while difficulties remain in other manufacturing industries. (HGVs) destined for the EU market can serve as a leading indicator of future economic activity in several sectors of the economy. Construction, manufacturing, wholesale and retail trade are some of the sectors most dependent on HGVs. Expectations of increased activity in such sectors are likely to translate into new orders for additional HGV capacity, whether to replace existing stock or to add new vehicles to the fleet. Figure 2 shows the quarterly development of new orders to the European market for HGVs from five major manufacturers (MAN, Daimler, Scania, Renault, Volvo). After a promising 2010 ending with units ordered in the fourth quarter, the trend has turned negative, indicating falling expectations in the main ordering sectors. Figure 2. Number of HGVs ordered for the European market from five major manufacturers. Note: Percentage change of industrial production indices in different manufacturing industries relative to the level in the first quarter of Source: Own calculations based on Eurostat data. New orders of heavy trucks provide information about business cycle developments in industry. In the automotive sector, new orders for heavy goods vehicles Source: Own calculations based on quarterly reports. 1 / 10

2 Optimism about future manufacturing activity increases everywhere but in the euro area. The most recent information from purchasing managers in the euro area reflects the pessimism about future activity in euro area manufacturing; expectations are lower than anywhere else. Previously pessimistic Japanese manufacturers now see a glimpse of light in the end of the tunnel, cf. Figure 3. Figure 4. Gold price developments provide hope of improving economic conditions Figure 3. Spring brings optimism except in the euro area Source: Own calculations based on World Bank data. The prices of metal futures may however cast doubt about such an optimistic reading of price dynamics. Three-month future prices in copper and aluminium decreased in March, cf. Figure 5. Other things equal, this would imply expectations of a drop in demand and of underlying industrial activity. Note: The Markit Eurozone Composite PMI covers surveys of purchasing managers in manufacturing companies. Values above 50 indicate increasing activity. Source: Markit Economics Prices of metals and gold indicate a possible recovery in manufacturing activity. Metals are important materials used in manufacturing and construction. Price changes of these input goods reflect changes in demand and supply. Given the current capacity, expectations of higher future demand usually translate into increased demand prices of metals and minerals. Another key business cycle indicator is the price of gold. Gold is widely regarded as a safe haven for investors in uncertain times and therefore a substitute for other assets such as stocks and bonds. Gold prices are also influenced by countries increasing or reducing their foreign exchange reserves in order to reduce the risks of currency developments. Following the outburst of the financial crisis, gold prices increased until the peak in August Movements since then reflect the prevailing large uncertainty about the future. Rising metal prices against the backdrop of declining gold prices might if sustained signal expanding economic activity, cf. Figure 4. Figure 5. Decreasing metal prices indicate declining demand Note: Prices are in USD/ton. Copper prices are on the left axis; and aluminium prices on the right axis. Source: London Metal Exchange. Final demand is still on the downward trend, which makes investment demand prospects uncertain in the short term. Investment is influenced by uncertainty and by expectations of future activity and profits. As shown above, expectations in the EU about future economic industrial activity are less optimistic than in other regions. Also, according to the latest available data on sentiments in the industry, demand expectations remain subdued in the first quarter of 2013, hampering investment demand, cf. Figure 6. 2 / 10

3 Figure 6. Persistent low expectations of future demand contract investments Figure 8. The Euro Growth Indicator predicts a gloomy first half of 2013 Note: Quarterly percentage changes of investments vs. the same quarter of the previous year. Quarterly averages of monthly future expectations in the industry, INDU. Source: Own calculations based on data from DG ECFIN and Eurostat. The short-term expectations of DG ENTR sectoral experts are predominantly negative, especially for the three metal-manufacturing sectors. This is linked to persistent weaknesses in the construction and automotive sectors in combination with euro area austerity. The overall outlook for the pharmaceuticals sector has improved from January and is now positive, cf. Figure 7. Figure 7. Short-term outlook in key manufacturing sectors Note: The bars represent changes from the previous quarter. Source: Euroframe. The IARC indicator points to improvements during the second quarter of The Coe-Rexecode IARC indicator points to a possible rebound of the euro area growth cycle during the first half of The indicator signals a high probability of a trough in the first quarter of 2013 which also implies a positive growth rate on an annual basis for the second quarter. This implies that there might be a rebound of euro area growth this year during the next quarter. The PRI on the other hand provides a less optimistic view on future developments. According to the PRI, which has been revised since the January edition, EU27 manufacturing conditions will continue to be tough during the first half of 2013, cf. Table 1. Source: Own calculations based on questionnaire replies from DG ENTR units. The slowdown of manufacturing industries recovery, with restrained investment demand and pessimistic expectations of purchasing managers in the euro area, point to a weak first half of This is confirmed by the Euro Growth Indicator. The latest update of the Euro Growth Indicator foresees a continuing recession in the Euro area, cf. Figure The Euro Growth Indicator is published by Euroframe, It can also be used as a leading indicator for industrial production in the euro area. 3 / 10 Table 1. Rebound or continuing recession in 2013? IARC PRI 2012: : : : : : : Source: IRC and IARC: Coe-Rexecode. PRI: own calculations based on Eurostat data. Note: The IRC is a coincident indicator of the growth of euro area GDP. The IARC is a leading indicator which aims at predicting turning points in the Euro area GDP growth cycle during the coming quarters. PRI is a Probability of Recession Indicator for the EU-27 manufacturing production. PRI also predicts the probability of a recession for the coming months based on a forecast for the period February 2013 to June The forecast of EU27 industrial production underlying the PRI indicator is shown below. The forecast is made on monthly data for EU27 manufacturing production and

4 the forecast period is February 2013 to June As mentioned above, the model is subject to uncertainty and the results should be taken with caution (the forecasts for December and January in the previous edition were about 1.5% lower than the actual levels of industrial production). According to the forecast, manufacturing production will decrease during the first half of 2013, cf. Figure 9. Figure 10. The DG ENTR CLI points to a small increase of EU manufacturing production during the first quarter of Figure 9. EU27 manufacturing production slows down during first half of 2013 Source: Own calculations based on Eurostat data and financial indicators. Note: The ENTR CLI is based on some 40 indicators from the real and financial sectors with leading properties for the EU27 manufacturing production. The CLI is calculated with means of a principal components model. Note: The forecast is made for the period March June The vertical blue line indicates the beginning of the forecast period. The forecast is performed with a bivariate VAR model including industrial production and producer prices. The method is based on the Blanchard-Quah methodology for identifying "supply" and "demand" shocks in the economy. The uncertainty surrounding the current situation is illustrated by the DG Enterprise and Industry Composite Leading Index (ENTR CLI) below. Developments in the ENTR CLI lead the manufacturing production by one quarter. The increase in the ENTR CLI at the end of 2012 indicates an increase of EU27 manufacturing production by less than one percent during the first quarter of 2013, cf. Figure The last available observation for EU27 manufacturing production was February 2013 at the time for the forecast. 4 / 10

5 Policy Debate Resource efficiency and reindustrialization 3 Human activity, including economic activity, is often about acting on matter: transforming the wood of a tree into a table, mining minerals to build tools or extracting coal for energy. The use of materials sometimes gives rise to negative effects that may call for public intervention: the generation or extraction and transportation of natural resources is associated with a potential impact on the environment; the depletion of non-renewable natural stocks raises issues of intergenerational fairness; the use of certain materials, notably the burning of fossil fuels, is associated with negative externalities. This note looks at the materials the EU uses and explores the possible drivers of observed consumption patterns. It also discusses the conceptual problems associated with aggregate measures of resource efficiency, calling for a careful assessment of each material. The development and collection of harmonized statistics is underway. To this day Eurostat has detailed information for the period and for a long list of subcategories. Unfortunately, DMC does not include flows embodied in imports and exports of raw materials and products. 5 Material consumption is fairly stable across EU Member States: around or slightly less than 20 tonnes per capita on average in Figure 1. Domestic material consumption (DMC) per capita across EU Member States How much stuff we use The main index measuring our use of materials is domestic material consumption (DMC), the annual quantity of raw materials extracted from the domestic territory, plus all physical imports minus all physical exports, expressed in tonnes. Domestic material consumption distinguishes four main categories: Biomass: Crops Crop residues, fodder crops and grazed biomass Wood Live animals and animal products. Metal ores: Iron ores Non-ferrous metal ores. Non-metallic minerals: Marble, granite, sandstone, porphyry, basalt Clays and kaolin Sand and gravel. Fossil Energy Materials/Carriers: Coal and other solid energy materials/carriers Liquid and gaseous energy materials/carriers. There are two other categories (Other products and Waste for final treatment and disposal) which are much less important in terms of quantities. 4 Source: Eurostat, Material flow accounts [env_ac_mfa], and own calculations. Most materials are sourced domestically. Figure 2 shows that the dependence of foreign materials is moderate, around 15% of total DMC, even if higher for smaller countries. Figure 2. Net imports of materials per capita as a percentage of DMC, 2007 Source: Eurostat and own calculations. 3 This section is prepared by Jorge Duran-Laguna. Contribution and feedback from Unit ENTR/B.1 is gratefully appreciated. 4 More details can be found in Eurostat Statistics Explained webpage. 5 The data on flows are Eurostat Material flow accounts [env_ac_mfa]. Data are available for the period This note, however, uses pre-crisis data to focus on trends: static comparisons will then focus on 2007 while changes use the period / 10

6 This higher dependency of smaller countries may be due to two factors. First, the smaller the country, the smaller the probability that it has all the resources needed to enable the profitable extraction of the few resources it possesses. Second, in some very densely populated small countries there is also the question of land use and alternative cost: if virtually the whole country is taken up by towns and cities, economic activity or infrastructure it makes economic sense to leave the natural resources in the ground and buy them from abroad. By type of material, there does not seem to be a clear pattern associating large or small countries with a certain type of material. In Figure 3 countries are ranked from larger to smaller total material consumption. Non-metallic minerals play an important role in most countries. To understand the role of non-metallic minerals, note that these are the materials from which we build houses, roads, etc. Figure 3. DMC by type of material were we find both large net exporters and importers. If anything, countries with a large land area tend to be net exporters, like Sweden or Finland. A well-developed farming sector may render the country a net exporter as well, as in the case of France. In metal ores most countries had a complete dependence on imports: large iron ore deposits are fairly local. The exception here is Sweden which exports 60 per cent of its DMC of metal ores due to its reserves in the north of the country. This material is key for certain industries but the size in tonnes is relatively small, as illustrated by Figure 3. The lowest degree of foreign dependence is to be found in non-metallic minerals where most countries are virtually self-sufficient, with the exception of Luxembourg, Malta and, to a lesser extent, the Netherlands. The reason is that this is the kind of material that is mostly sourced domestically: firstly because it is abundant everywhere; secondly because it is costly to transport given its weight (e.g. granite worktops). Nevertheless, the material that is driving our foreign dependence is clearly the fossil energy materials and carriers. As seen in Figure 4, the dependence is considerable for most Member States while, as illustrated by Figure 3, these materials constitute an important share of total DMC. Figure 4. Net imports of fossil energy materials and carriers per capita as a percentage of DMC, 2007 Source: Eurostat and own calculations. The relevance of this fact lies in that, as will be discussed below, this is the kind of material for which there are more good reasons to limit consumption while for many countries these materials are the primary source of energy. It is human activity Source: Eurostat and own calculations. Where we find more heterogeneity is in the rate of dependence on foreign materials by type of material. The most disperse dependence is to be found in biomass The use of materials is directly linked to human activity. At any given moment in time the size of the population is an excellent predictor of the quantity of materials used: on average, a 1% increase in the size of the 6 / 10

7 population translates to almost an identical 1% increase in DMC. 6 Human activity includes economic activity and the positive relation between GDP and DMC is also clear and strong. Figure 6. The level of development is less tightly connected to material consumption Figure 5. The size of the economy and material consumption Source: Eurostat, AMECO, Commission services, and own calculations. And it seems that it is economic activity rather than economic development. This can be inferred from the tight relation shown in Figure 5 compared to the relatively loose relation between GDP per capita and material consumption per capita shown in Figure 6. The reason is likely to be found in different patterns of specialization: with increasing development, economies (like Luxembourg) may tend to specialize in sectors such as services requiring less material than manufacturing or agriculture (as in the case of Ireland). Source: Eurostat, AMECO, Commission services, and own calculations. However, given the size of the population and the size of the economy, an increase of the absolute level of economic activity also increases the absolute level of the use of materials. Over the period there were no major changes in the population, with the exception of Spain, but significant increases in the use of materials as illustrated in Figure 7. Figure 7. Changes in the use of materials A simple regression of DMC against population in logarithms shows that the population elasticity of domestic material consumption is 0.97 with a standard error of Source: Eurostat and own calculations. Germany, Italy and the Netherlands are the only big economies of the EU in which the use of materials decreased in absolute terms. In all other countries, the use of materials increased, in some cases very significantly. The main driver of these changes, both positive and negative, is the change in non-metallic minerals. Here the boom of the 7 / 10

8 construction sector in the period is most likely playing an important role. 7 Figure 9. Changes in the use of materials per euro of GDP in Measures of resource efficiency Material consumption is therefore linked to economic activity. But a glance to the next figure reveals large differences across countries when comparing the level of income with material consumption. Figure 8. The use of materials per euro of GDP Source: Eurostat, AMECO, Commission services, and own calculations. This chart plots a measure of material intensity defined as the quantity of materials per euro of value added. Sometimes the inverse of this ratio is interpreted as resource efficiency. Figure 8 illustrates the differences in resource efficiency across countries, while Figure 9 shows that most EU countries reduced their material intensity in the period under consideration. In other words, they increased their resource efficiency and managed to decouple material consumption from economic growth. Source: Eurostat and own calculations. The interpretation of these ratios in terms of resource efficiency, however, cannot be done without some conceptual clarifications. From the environmental point of view, dividing value added by materials entails the assumption that we can buy out the damage to the environment if any increasing the economy value of what we produce. From the engineering point of view, it would make sense to compare units produced (or their market value) with how much material was required in their production. This approach has three problems. First, it is impossible to account for all changes in the nature of the product, such as quality, because the mere counting or even the prices will not always reflect them. 8 Second, it is impossible or very difficult to track, down the entire value chain, all the materials that were effectively used to produce that particular commodity; as noted above, DMC does not account for materials embodied in imports. Finally, this approach may be conceivable in the case of a specific product or service but by its very nature it cannot be extended to baskets of heterogeneous commodities, that is, it cannot be translated to the aggregate: producing more wooden chairs and less granite worktops would give the illusion of increasing resource efficiency just because we shift production to commodities that require lighter materials. 7 There is a high correlation between the percentage changes in the use of non-metallic minerals and the increase in the weight of construction sector value added in the economy over this period. 8 Statistics offices resort to sophisticated techniques to measure hidden increases in quality in order to estimate quality-corrected prices, i.e. the price per unit of quality. 8 / 10

9 Furthermore, from a practical point of view, if the goal is to improve this so-called resource efficiency of the Member States, we risk penalizing the less developed regions in the EU. Lower levels of income are associated with significantly higher levels of material intensity. Figure 11. Some materials are used mostly by industry Figure 10. efficiency The level of development and resource Source: Eurostat, AMECO, Commission services, and own calculations. It so happens that, leaving aside biomass, the use of materials let us recall that they are measured in tonnes is mostly linked to construction and industry. For example, the use of metal ores is clearly linked to the weight of manufacturing in the economy. In other words, the dematerialization of the economy would amount to its deindustrialization. Source: Eurostat, AMECO, Commission services, and own calculations. Finally, a resource efficiency agenda ought to consider materials individually. DMC is a very broad index including materials that are not associated with serious negative externalities or hazards or materials that can be exploited in a sustainable way. Molybdenum is not renewable but is probably clean if extraction and enduser industries respect environmental regulations. Cotton is renewable so there is no reason to include it in a measure of material intensity if it is grown responsibly. 9 Conclusions In the past, growing income has been associated with increasing use of materials. In turn, some materials are associated with negative effects like negative externalities. However, in recent years we have observed a decreasing trend in material intensity, the quantity of materials consumed per euro, resulting in a decoupling of material consumption from economic growth. There are some exceptions, like Spain or Lithuania, but these seem linked to the boom of the construction sector in the period for which data is available. Even more, some 9 It would be difficult to set as a policy target the elimination of sustainable farming. Products from biodynamic agricultural exploitations like those certified by Demeter International would count as biomass material consumption in an index of resource efficiency. 9 / 10

10 countries like Germany or the Netherlands have reduced to total amount of materials used in absolute terms. 10 Increased resource efficiency may be associated with less pressure on the environment. However, as discussed above it is questionable that the use of materials is negative per se. The mere counting of tons of matter does not consider whether a given material is renewable or polluting, and this is the key to any assessment of sustainability. This means that a resource efficiency policy requires a careful assessment of each material individually: whether it is hazardous or its extraction, processing and/or use associated with negative externalities. In short, a resource efficiency policy ought to avoid targeting aggregate measures of resource efficiency that may be misleading; kilos of chemical waste cannot be added to kilos of organic apples. Fossil fuels are neither renewable nor clean, and hence there is a good case to avoid their use. Moreover, as seen above, they constitute the main driver in European dependency on foreign materials: reducing the dependency of the economy on fossil fuels will improve the environment, help contain global warming and reduce the EU s dependency from foreign energy sources. The Short-term Industrial Outlook is prepared by a team from Unit ENTR/A.5 Economic Analysis and Impact Assessment, led by Tomas Brännström. This publication does not necessarily reflect the view or position of the European Commission. 10 These numbers have to be interpreted with care: the data does not account for materials embodied in exports and imports, a detail which may be relevant given the increasing internationalization of the value chain. 10 / 10