Latest posts by Adrian Lloyd (see all)
2019 Manufacturing Downturn – A Forecast Revisited
Early last year, we predicted (with help from our friends at ITR Economics) a 2019 manufacturing industry downcycle. Now that 2019 is here, we have updated our forecasts and are predicting the slowdown to be more much more pronounced; however, we still do not expect the global manufacturing economy to contract.
The latest data from our Manufacturing Industry Output (MIO) Tracker predicts the manufacturing economy will grow by just 0.7% in 2019, significantly lower than the 2.5% growth we projected in May 2018. A major factor in this revision is the dramatic slowdown of the Chinese market. As detailed in our review of China’s manufacturing industry, published last week, the outlook for the region has deteriorated significantly in recent months. We previously forecast a relatively modest growth rate of 5.8% in 2019, which at the time seemed a bold prediction; our latest forecast predicts annual growth of just 1.8%. Since China contributes close to half of global manufacturing output, meaningful revisions to China will impact the larger manufacturing economy.
After China, the three next largest manufacturing economies are the USA, Japan and Germany accounting for 14.9%, 8.3% and 5.2% of total manufacturing industry output (MIO) value respectively. Our forecast for Japan remains unchanged from last Spring, with few material changes to the region since last May. Interestingly, the IMF has upwardly revised its real GDP forecast for Japan by 0.2 percentage points citing “additional fiscal support to the economy this year”, which supports our previous forecast. The US and Germany, however, are experiencing quite different dynamics than anticipated, and these are reflected in our new forecasts.
The USA Economy – a Question of Timing
The USA has not slowed as quickly as originally anticipated. Industrial production was expected to contract in 2019, but a combination of monetary stimulus brought on by the tax cuts of 2018, as well as the upfront purchasing of inventory to reduce exposure to impending tariffs, contributed to a lifting (or delaying) effect (depending on how you look at it). As a result, we have revised our 2019 manufacturing industry output (MIO) growth rate for the US from negative 1.4% to a positive 0.4%. Alex Chausovsky at ITR Economics informed us that these factors have shifted the timing of the US economic downturn back to between late 2019 and mid-2020. The timing means these periods of poor economic performance will be book-ended by more positive quarters, resulting in GDP being forecast to not enter negative territory in either 2019 or 2020. As such, our 2020 manufacturing industry output (MIO) forecast for the US also stays in the black at 1.0%.
The US is arguably one of the most important components of our forecast. While China is the single largest market, it does not function in isolation. The interconnected nature of the global economies means that a downturn in one country can quickly spread and infect other regions and the rest of the world. The spark behind the last major economic collapse was the US sub-prime mortgage market causing severe disruption in global financial markets. As one of the largest consumption and manufacturing markets, we place great stock in trying to understand how the US economy will evolve to inform our global picture. Looking ahead for the long-term, ITR Economics anticipates a US recovery in the late-2020 to 2021 period, followed by an expectation that 2022-2023 will be the most likely timeframe for a more notable economic downturn. Our forecasts reflect this and can be seen in the figure depicting long-term growth rates for the four major manufacturing economies.
Germany – a Leading Indicator
While our numbers for the US have been upwardly revised, in contrast our sentiment for Germany (and the European economy in general) has been adjusted downwards. Indicators from Eurostat suggest that during the back-end of 2018, manufacturing output dropped significantly. In our last forecast we were expecting Europe to be impacted significantly by the 2019 downturn, but our latest forecast shows a deepening of this impact. Germany will be hit hardest due to its major reliance on manufacturing within its broader economy and coupled with the major uncertainty being brought on by Brexit. We forecast Germany’s manufacturing output to contract by 2.6% in 2019, compared with our previous forecast of –1.6%. German manufacturing contracted previously in 2014 and 2016, but not to this extent. We are also mindful that even this latest forecast could be optimistic; we are generally of the view that Brexit will either be cancelled (or indefinitely delayed) or be of some “soft” variant, which will minimize instability in the region. However, a hard Brexit scenario is still on the table and would be majorly disruptive to the global manufacturing economy. In such a scenario, we would make further, and significant, downward revisions. The next few weeks will be a critical time both for Europe and the Global economy.
“Manufacturing Industry Output Tracker”, a report to offer the most complete and unified analysis of the manufacturing industry globally. Click here
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