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Forecasts from our recently released Manufacturing Industry Output Tracker show that global manufacturing output value will dip in 2019, driven by contractions in both the Americas and EMEA. Although global growth is not forecast to turn negative next year, it will slow considerably to 2.5 percent with China’s manufacturing output growth nearly halving. Global manufacturing output growth was 6.8 percent in 2018 according to the report. The downturn however is predicted to be mild and short-lived, with growth accelerating again in 2020.
Economic research and consulting firm, ITR Economics, who Interact Analysis recently announced a partnership with, helps instruct our manufacturing output forecast through its close correlation with industrial production. Insight into ITR’s thinking follows.
ITR Economics View of 2019
Alex Chausovsky, Senior Consulting Advisor, ITR Economics
ITR Economics’ business cycle forecasting methodology is predicated on the proven fact that economies do not exist in a perpetual state of growth. Periods of economic expansion are always finite, with recessions being inevitable, recurring events. Looking at the past forty years of the US economy as an example, it is quite evident that there was a significant recession in the early 1980s, followed by another, albeit shallower downturn in the early 1990s, and then another economic contraction in the early 2000s. These recessions are clearly seen as the “V” shapes below the zero line in the chart below.
It is not difficult to see a roughly ten-year major economic cycle emerge, with smaller downturns occurring two or three times within each decade. Based on this timing, the next recession should have come in or around 2010, but misbehavior on Wall Street, a banking sector crisis, and a housing bubble culminated in a perfect economic storm in 2008 to bring about what is now commonly referred to as the Great Recession. Looking forward ten years from the 2008/09 calamity, the business cycle model predicts another contractionary period to emerge in 2019. This is one of the main reasons that our forecasts call for a (mild) recession to occur in the US and global industrial economies next year, whereas many other economic firms continue to project persistent economic growth far into the future. In addition to the business cycle analysis for which ITR is well known, we also have a system of leading economic indicators that over the past six months have started to confirm our expectation of an industrial and manufacturing recession taking place next year.
As can be seen above, historically, when Industrial Production falls below the year-ago level (indicating recession), Gross Domestic Product will also move toward, and sometimes below, zero growth. However, that did not occur during the latest Industrial Production downturn that took place in late 2015 and throughout much of 2016. Despite a relatively flat performance in manufacturing, the weakness in commodity prices (particularly in oil and gas and base metals such as steel and copper), along with a general slowdown of industrial demand that resulted in a utility sector contraction, caused a mild Industrial Production recession.
However, personal consumption activity remained robust enough to offset the weakness in the industrial part of the economy, allowing GDP to continue growing during that time. The diversion between the industrial and consumer aspects of the US economy was on full display. We expect a similar economic environment to emerge in the US in 2019, with GDP expanding next year, while Industrial Production endures a mild and short-lived recession.
The nature of the interconnected global economy is such that it’s nearly impossible for the US, which makes up approximately 25% of global economic activity, to go through a mild recession in Industrial Production without it also being felt in many other parts of the world. That’s not to say that US economic performance is the single determining factor behind what happens in Europe, Asia, or elsewhere, but a slowdown in the world’s largest economy will naturally have an impact on other nations. In addition, a global slowdown is also an acknowledgement that the business cycle is predominant in much of the rest of the world as well. As such, the Eurozone, which also comprises roughly 25% of global economic activity, and China, which makes up about 15% of the world economy, are also expected to witness mild downturns in their respective industrial economies and manufacturing sectors. Industrial Production may not turn negative in China, the way that it is expected to in the US and Europe, at least not according to official government data, but a dip in the Chinese industrial economy will occur nonetheless. Our forecasts for the US, Europe, and Chinese Industrial Production series are illustrated in the final chart below.
Although a downturn in industrial activity, and in the manufacturing sectors in many countries, is expected to take place next year, the positive news is that it will be relatively painless. ITR Economics expects the recovery to come swiftly and Industrial Production to resume growth as soon as 2020, with expansion persisting into 2021 and beyond. In general, we expect the first half of the next decade to be marked by general positivity in the global industrial environment, which bodes quite well for the manufacturing industry.
In summary, observing and predicting economic cycles whilst correlating economic activity to industrial production leads ITR to predict a weakening outlook for the industrial sector next year. This viewpoint is reflected in Interact Analysis’ manufacturing output forecast. Thankfully this dip will be shallow and short-lived, but a downturn nonetheless.