Outlook for industry: electromobility and semiconductor industry benefit

After catching up, demand in most segments has plateaued at a high level

Many states are announcing their reduction of the tough Corona measures these days. In particular, the beleaguered service providers such as the restaurant and hotel industry will benefit from these important opening steps.

The economy, however, is currently struggling with many other complexities. In particular, high inflation, the geopolitical conflicts in Ukraine and Taiwan, the still unresolved real estate and debt crisis in China, and the still noticeable disruptions in supply chains are weighing on sentiment.

How is this affecting the industry and what are hpo forecasting's assessments? The hpo forecasting team has evaluated the latest economic data and we are happy to share with you our key findings in this economic commentary for the industry.

1. New orders in the German mechanical engineering sector have flattened out at a very high level

The Association of German Mechanical and Plant Engineering (VDMA) reported a 32 % increase in incoming orders from its member companies for 2022 compared to the previous year. The average order backlog has risen to 10.9 months. These are impressive figures, and the recovery was very welcome after the deep fall in 2020. This means that, on average, mechanical engineering companies in Germany and the German speaking Europe as a whole were able to far more than compensate for the slump in the initial phase of the pandemic.

Fig. 1: Order intake mechanical engineering Germany

Source: Raw data by Destatis; Illustration by hpo forecasting

However, there are considerable differences between the industrial sectors. While demand for construction and textile machinery has shot well above pre-crisis levels, the 12-month average order intake in the machine tool industry at the end of the year is still around a quarter below the previous peak of 2018. The shift in the automotive sector – which is central to the German machine tool industry – towards electronic drive systems and the negative global trend growth in the automotive industry is likely to play a role in this. However, in December, Germany’s late-cyclical machine tool segment also showed a strong recovery.

In the 4th quarter of 2021, order intake in many segments of the capital goods industry stabilized at a high level. Do the current highs mark the beginning of a prolonged boom phase, or will we soon experience another sharp decline?

2. The normalisation of consumption patterns is delayed again due to the Omicron wave

In hpo’s economic commentaries, we have repeatedly explained how the pandemic has massively changed the usual consumption patterns. The lockdowns caused household spending on services to plummet, especially in Europe. Despite a strong recovery in the 2nd and 3rd quarters of 2021, this spending in Europe was still below the pre-crisis level of the 4th quarter of 2019 in real terms.

Very little differentiated data has yet been published for the fourth quarter. However, the little data already available points to another sharp decline in household demand for services in the 4th quarter of 2021, while the recovery in the U.S. continued.

However, thanks to the increased savings rate in the pandemic, consumers have accumulated comparatively high savings. These are being spent mainly on consumer goods and especially on consumer durables. The already available data for the 4th quarter of 2021 suggest that spending on consumer goods rose sharply again in Europe and remained at high levels in the U. S. By the end of the 3rd quarter, it looked as if the consumption pattern in Europe would quickly return to normal, but in the 4th quarter, the spending gap per consumption class was likely to increase again as a result of the new Corona measures (see fig. 2).

Fig. 2: Consumption patterns Europe during the pandemic

Source: Raw data by Eurostat, dotted lines estimated by hpo forecasting

The gap between spending categories in the U.S. remains large (see fig. 3).

Fig. 3: Consumption patterns in the U.S. during the pandemic

Source: Raw data by Bureau of Economic Analysis (BEA); Illustration by hpo forecasting

High spending on nondurables and consumer durables is good news for the industry because these products need to be produced. This may be part of why the demand for German machinery remained very high in the 4th quarter, as it had been in the 3rd quarter.

3. Industrial production has reached a very high level

According to the OECD, Europe’s industrial production already reached pre-crisis levels in November 2020, and the last available data point (Nov. 2021) rose to a new absolute record level. Overall, industrial production in Europe plateaued in 2021.

In China, industrial production had already recovered very strongly by the beginning of 2021. It then returned to the long-term growth path in the high single-digit percentage range.

The situation in the U.S. is different. It took longer for industrial production to recover despite booming consumption, and the level is still around 2 % below the 2018 peak.

4. Critical moment for sentiment indicators

In terms of fiscal and monetary policy, only China can be expected to provide positive impetus in the short term, but the leeway is limited due to the still surging real estate and debt crisis.

The big unknown is still the geopolitical development with the current hotspots Ukraine and Taiwan, with potentially fatal consequences for people and the economy.

5. Outlook for the industrial sector

According to hpo’s model calculations, demand for capital goods is expected to weaken across the board in the new year.

Sectors that should benefit from the current environment are the semiconductor industry and the electromobility sector. Semiconductor manufacturers are outdoing each other with gigantic investment announcements, which are also heavily subsidized for geopolitical reasons and could lead to overcapacities in a few years. Significant investments are also still expected in electromobility if the ambitious shift targets are to be achieved.

Now that the Omicron wave has subsided, consumption patterns are finally likely to slowly return to normal. The industry will feel the effects when consumers spend more money on vacations and leisure and less on consumer goods. A supportive factor, on the other hand, is that unemployment rates remained relatively low during the pandemic or recovered quickly.

However, high inflation forces central banks to adopt a more restrictive fiscal policy. This will have a dampening effect on the economy. Fiscal policy is also becoming more stringent after government spending ratios rose very sharply in the wake of the pandemic.

In terms of fiscal and monetary policy, only China can be expected to provide positive impetus in the short term, but the leeway is limited due to the still surging real estate and debt crisis.

The big unknown is still the geopolitical development with the current hotspots Ukraine and Taiwan, with potentially fatal consequences for people and the economy.