Adrian has been conducting research on, and managing teams of analysts covering, the technology industry for over 20 years. He has pioneered many data analysis techniques and methods that are used widely by analysts today, as well as having created frameworks for measuring numerous technology markets from industrial automation products to semiconductors.
After an exhaustive effort, we have finalized our assessment of the impact COVID-19 has had on manufacturing output around the world. In this insight I will be sharing some of the high-level findings from this work.
If you find this content interesting, we have decided to make the full report available to all companies for free. Click here for more information. We are all trying to help each other by giving a little back during this crisis, and this is our way of doing that. We hope that this information contributes to companies making sound decisions to better cope with how they are managing their businesses during this crisis.
Global Manufacturing Output Down by 7.6% in 2020…
In January 2020, we expected manufacturing output around the world to begin the first part of a rising trend, having experienced slower periods in 2018 and notably 2019. This expectation was based on various short-range historical measurements and forward-looking indicators. The fundamentals for a strong 2020 were in place, with a US recovery being projected to take place slightly later during the second half of 2020.
COVID-19 has severely disrupted the general economy in a manner that has never been seen before. We have seen significant downturns in the past, with 2009 (“the Great Recession”) being the most notable. However, the COVID-19 event is unusual in that it is happening while the basic market fundamentals for many economies were sound, and because of the speed at which normal operations were impacted.
Figure 1 shows the value of manufacturing industry output (MIO) around the world aggregated using a fixed currency method to eliminate impacts of forex movement. Our 7.6% forecast contraction is not expected to be as severe as the contraction experienced in 2009 (8.6%), but it is close. These two events are quite different in nature, although some synergies in behavior in certain sectors of the market are to be expected.
In constructing these forecasts there were two key dimensions that we had to consider: (i) which industries are most impacted by the Coronavirus, and (ii) how effective each country has been at managing the crisis and thus minimizing disruption. Other factors were considered too, such as the impact of the crash in oil prices on certain manufacturing sectors, but in general our forecasts are influenced by the assumptions we have made surrounding these first two key questions.
Which Industries are Most Impacted by the Coronavirus?
Generally speaking, transportation industries have been most severely impacted, and we are projecting that all three transportation-related sectors (aerospace, automotive and commercial vehicles) will take the entire forecast to approach or surpass 2019 levels. While normal operations will likely resume within the next two years, COVID-19 will clearly leave a scar on these industries. As we saw from events following 9/11, disrupted air travel can take years to return to previous levels. Similarly, for automotive, the potential long-term impact on reduced employment will erode disposable income, and with it people’s willingness to purchase big-ticket items or take on long-term debt.
The food and beverage sector is predicted to be least affected. This industry seems to ride most downturns, and the fundamental driver of growth – population – will not slow over the next five years. It’s not a sector that achieves high growth rates, but ticks along fairly steadily over time, and we see no reason to believe this situation to be any different.
Figure 2 is intended to visualize the trajectory of recovery. The key reference point to consider is the 100% line on the chart, as when a bar crosses this point it has surpassed its value in 2019.
How Effective Has Each Country Been at Managing the Crisis?
During the first phase of COVID-19 economies and manufacturing output were significantly disrupted. This disruption was caused by various factors such as the shuttering of buildings (whether voluntarily or mandated), the absence of workers, the drop in demand and the availability of components.
One key question we have been asking is what will happen next. We anticipate that the degree of overall impact and the time it takes for a region to recover will vary depending on how affected a region was. For those most affected regions such as the US, UK, Italy, India and Brazil we have assumed that the return to recovery will be softer in 2021 and stronger in 2022. Whereas for regions that have seemingly handled the virus effectively, such as Korea and China, we are anticipating 2021 being a stronger year versus 2022.
A counterpoint to this argument could be that we are seeing considerable effort for things to be restored to normality within the US economy (for example), despite the pandemic having not been properly contained. Therefore, would it not be the case that the US will have a strong 2021 and a slower 2022? We don’t know for sure, but our belief is that this type of effort will not end well. The virus is unusually contagious, can be carried asymptomatically and will quickly spread given the chance. A region could cope with this approach with adequate testing, a robust healthcare system and rigorous tracing programs in place. But in the cases of the USA, Brazil and India, these capabilities are not in place, and are not likely to be any time soon. As such, it seems inevitable a “second wave” will take place, and this will cause disruption as affected people will have to be quarantined, colleagues tested, and buildings temporarily closed. Such things hinder growth.
This final figure provides a visual representation of the regional impact of COVID-19 on the top ten manufacturing economies of the world. While regions that have been affected severely by the Coronavirus can be seen to have a more severe down period for manufacturing output in the region, one outlier is Germany. Germany has clearly handled the crisis well. Using a series of proactive measures including the closure of schools, bars, and restaurants, as well as active testing and well executed social distancing, the virus has been contained. Efforts to return to normality are now underway, and proof of this is that the Bundesliga is set to return in two weeks’ time. In spite of this we have Germany being most severely impacted – why is this? Germany’s manufacturing segment is hugely reliant upon exports, and it is this factor that we believe will weigh most heavily on the country going forward. To add insult to injury, Germany’s automotive sector is its single largest sector accounting for nearly one fifth of industry output. Combining transportation equipment and metals, we see these at-risk sectors are approaching half of the country’s manufacturing output. It is these two factors that contribute to Germany being one of the most affected regions by the Coronavirus in our predictions, and one of the slowest to recover.