European Industrial Outlook: Recession, Uncertainty Clouds Short-Term Forecasts

The European manufacturing sector saw an accelerated downward trend in the first part of 2009 and will face challenges throughout the year, before seeing the potential for marginal improvement in 2010, according to the semiannual Manufacturers Alliance/MAPI.

MAPI's new report separately analyzes two distinct regions: Western Europe and Central Europe. The former generally comprises the 15 countries that form the currency union (Eurozone), while the latter includes the four largest economies of Central and Eastern Europe (CEE4): the Czech Republic, Hungary, Poland and Slovakia.

Kris Bledowski, Ph.D., Manufacturers Alliance/MAPI Economist forecasts a continued decline for the Eurozone economy in the second half of 2009 before a slow recovery emerges in 2010. The economy of Central Europe, which appeared in reasonable health only nine months ago, will also see a significant downturn, albeit less severe than that of the Eurozone. Bledowksi sees Central Europe experiencing a "shallow and hesitant" recovery in 2010.

"The two parts of Europe now resemble each other more in terms of cyclical timing than we observed six months ago," he said.

In the Eurozone, 13 of the 14 industries will likely decline in 2009, including seven by double-digits, with motor vehicle production falling the most, by 17.9%. This sector, however, should rebound with an industry-high 8% growth in 2010 and could be a harbinger for near across-the-board improvement. The report envisions a more positive outlook next year with 13 industries showing growth. In 2010 the lone industry expected to decline is textiles, by 5.9%.

Bledowski reports that two industries, petroleum/coke and chemicals, are in the accelerating growth (recovery) phase in the Eurozone while 12 industries are in the accelerating decline (either early recession or mid-recession). None is in the decelerating growth (expansion) phase or in the decelerating decline (late recession or very mild recession) phase of the cycle.

In Central Europe, a more modest 10 of 14 industries will decline in 2009 and, like the Eurozone, just one industry is forecast to decline in 2009. Textiles will decline in both years, forecast to fall by an industry-high 14.6% in 2009 and by 1% in 2010. Computers and electronics should lead the rebound with 19.4% growth in 2010, followed by machinery and equipment at 12.7%.

"Clearly, trade linkages have coupled these two parts of the continent more tightly together," Bledowski said,"but there is still a lag between an earlier and deeper recession in the Eurozone and a later and lighter recession in Central Europe."