European Industrial Outlook: Majority of Sectors Still Growing, but Facing Decline

Continent's producers still riding strong tail end of investment cycle; Manufacturers Alliance/MAPI reports brighter prospects for Central Europe than for Western Europe;

Arlington, VA — November 29, 2007 — The European manufacturing sector appears to have reached its cyclical peak in growth rates in the first quarter of 2007, although it is unlikely to fall into a recession in 2008, according to the Manufacturers Alliance/MAPI's "European Industrial Outlook: 2007-2008" report analyzing 21 major industries.

The report divides Europe into two distinct regions, Western Europe and Central Europe. The former generally comprises the 13 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.

Manufacturing production in Western Europe is still rising, if somewhat hesitatingly, but at a declining rate. German manufacturers enjoy the most robust growth dynamics and the most consistent order books, while the French and Italian producers are clearly suffering. Spanish and British companies fare somewhere in between.

Central Europe's Outlook

The outlook for Central Europe is more promising. Growth rates are sliding, but production is still rising at near double-digit rates, led by Slovakia on the strength of its booming auto and components sectors. All four emerging economies appear resilient in the face of mounting financial challenges in the United States and Western Europe, due primarily to the fact that the vast majority of domestic manufacturers fund themselves in local markets.

Additionally, the financial institutions in these economies hold few external assets issued outside their borders and virtually none that bear risk to under-performing sectors such as U.S. subprime mortgages. These economies, however, will be indirectly affected by falling income in Western Europe, which is the primary destination for CEE4 exports.

Kris Bledowski, Manufacturers Alliance/MAPI economist and analysis author, writes that four industries in Western Europe are in the accelerating growth (recovery) phase of the business cycle; 13 are in the decelerating growth (expansion) phase; three appear to be in the accelerating decline (either early recession or mid-recession) phase; and one is in the decelerating decline (late recession or very mild recession) phase of the cycle. Top year-over-year performers through mid-2007 were office machinery (20.3 percent growth) and electronic components (20 percent growth).

Strong Tail of Investment Cycle

In Central Europe, three industries are in the accelerating growth phase, 14 in decelerating growth, three in accelerating decline, and one in decelerating decline. Three industries showed exceptional annual growth through June 2007: television and radio transmitters (26.8 percent), fabricated metals (20.8 percent), and machinery and mechanical engineering (20.3 percent).

"The European expansion lags behind the United States, and so the continent's manufacturers are still riding a strong tail end of the investment cycle there," Bledowski said.

The Manufacturers Alliance/MAPI, established 1933, is a nonprofit organization engaged in economic and policy research, continuing professional education and allied activities. The Alliance's corporate membership includes U.S.-based and international companies in manufacturing and related business services.

The European report follows the alliance's recent Quarterly Economic Forecast report citing a confluence of challenges — including the recent housing collapse and credit crunch, rising oil prices, slowing employment growth and lack of consumer confidence — that have conspired to signal a significant near-term economic slowdown in the U.S. economy.