Short-term Industrial Outlook

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.
(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 70 000 units ordered in the
fourth quarter, the trend has turned negative, indicating
falling expectations in the main ordering sectors.
Figure 1. Pharmaceuticals and food and drink industries
are above pre-crisis levels while difficulties remain in other
manufacturing industries.
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 2008.
Source: Own calculations based on Eurostat data.
Source: Own calculations based on quarterly reports.
New orders of heavy trucks provide information about
business cycle developments in industry. In the
automotive sector, new orders for heavy goods vehicles
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Figure 4. Gold price developments provide hope of
improving economic conditions
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 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.
Figure 5. Decreasing metal prices indicate declining
demand
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 2011. 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.
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.
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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.
Note: The bars represent changes from the previous quarter.
Source: Euroframe.
The IARC indicator points to improvements during the
second quarter of 2013. The Coe-Rexecode IARC
indicator points to a possible rebound of the euro area
growth cycle during the first half of 2013. 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.
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
Table 1. Rebound or continuing recession in 2013?
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 2013. 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 8.1
IARC
PRI
2012:12
85.7
0.94
2013:1
90.6
0.94
2013:2
86.2
0.93
2013:3
85.2
0.93
2013:4
0.92
2013:5
0.91
2013:6
0.89
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 2013.
1
The Euro Growth Indicator is published by Euroframe,
http://www.euroframe.org/index.php?id=9. It can also be used as a leading
indicator for industrial production in the euro area.
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
3 / 10
Figure 10. The DG ENTR CLI points to a small increase of
EU manufacturing production during the first quarter of
2013.
the forecast period is February 2013 to June 2013.2 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 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 2013. 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 10.
2
The last available observation for EU27 manufacturing production was
February 2013 at the time for the forecast.
4 / 10
Policy Debate
The development and collection of harmonized statistics
is underway. To this day Eurostat has detailed
information for the period 2000-09 and for a long list of
subcategories. Unfortunately, DMC does not include
flows embodied in imports and exports of raw materials
and products.5
Resource efficiency and reindustrialization3
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.
Material consumption is fairly stable across EU Member
States: around or slightly less than 20 tonnes per capita
on average in 2007.
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.
Figure 1. Domestic material consumption (DMC) per capita
across EU Member States
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.
How much stuff we use
Source: Eurostat, Material flow accounts [env_ac_mfa], and own calculations.
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.
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.
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.
Figure 2. Net imports of materials per capita as a
percentage of DMC, 2007
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 and own calculations.
5
The data on flows are Eurostat Material flow accounts [env_ac_mfa]. Data
are available for the period 2000-09. This note, however, uses pre-crisis data
to focus on trends: static comparisons will then focus on 2007 while changes
use the period 2000-07.
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.
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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).
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.
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 3. DMC by type of material
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.
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
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
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Figure 6. The level of development is less tightly
connected to material consumption
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 5. The size of the economy and material
consumption
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 2000-07 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.
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).
Figure 7. Changes in the use of materials 2000-07
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
6
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 0.06.
7 / 10
Figure 9. Changes in the use of materials per euro of GDP
in 2000-07
construction sector in the period 2000-07 is most likely
playing an important role.7
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 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.
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.
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
8
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.
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
Figure 11. Some materials are used mostly by industry
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 10. The level of development and resource
efficiency
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
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.
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
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