DG Enterprise and Industry

Short-term Industrial Outlook

January 2014

Highlights: Focus of economic recovery shifting from EU exports to domestic consumption

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Manufacturing of pharmaceutical products is going from strength to strength in the EU. However,
there is uncertainty going forward, as emerging economies become more important producers.

EU production of motor vehicles, in particular heavy goods vehicles, is growing faster than most
other sectors. By virtue of its supply chain, growth in the automotive industry will have positive
spillover effects on other sectors of the EU economy.

More new orders expected in steel and chemicals (both part of the automotive supply chain).

The employment outlook in EU industries such as aluminium, copper, and food is deemed to be
negative in the short term.

As the main driver of EU recovery is shifting from exports to domestic demand, EU manufacturers
producing for the internal market will benefit, while exporters may suffer.

Among the EU sectors monitored in the Short-term

Industrial Outlook, the pharmaceuticals sector continues
to be the only sector which produces above its 2008
level of output.1 In fact, pharmaceuticals production is
higher than before the recession in all Member States
except France and Latvia.

Some other monitored sectors are expanding their

output on the back of strong exports and growing
domestic demand, but still have some way to go before
they are back at pre-crisis levels of output (Figure 1).

Figure 1. EU manufacturing back on track?

Figure 2. New orders for heavy goods vehicles (HGVs)

for the European market from five EU manufacturers

Note: Percentage change of industrial production indices in different

manufacturing industries relative to the level in the first quarter of 2008.
Source: Own calculations based on seasonally adjusted Eurostat data.

Source: Own calculations based on quarterly reports of Daimler, MAN, Volvo,

Renault and Scania.

The monitored sectors are chemicals, pharmaceuticals, food, mechanical

engineering and metalworking, motor vehicles, steel, copper, and aluminium.
The selection is based on their combined value added contribution and their
strong links with other EU sectors. See also page 5 (Sectoral Overview).

The production of motor vehicles, which suffered badly

as a result of the crisis, is growing again. This is in no
small part due to the growing order books of heavy truck
manufacturers such as Daimler, MAN, Volvo, Renault
and Scania, where new orders for the European market
have risen the last four quarters, from a low of 47000

This publication does not necessarily reflect the view or position of the European Commission

units in the third quarter 2012 to a high of almost 76000

a year later (Figure 2).

Table 1. Positive signals from national sectors

Share of Member State manufacturing sectors with higher
2013 output than in 2008q1 (%)

New orders of HGVs destined for the European market

can serve as a useful leading indicator of future
economic activity in EU sectors such as construction,
manufacturing, wholesale and retail trade. Expectations
of increased activity in these and other sectors are likely
to translate into new orders for additional HGV capacity,
whether to replace existing stock or add new vehicles to
the fleet. The rise in new orders in recent quarters can
therefore be seen as an indication of increased
economic activity ahead.

2013q1 2013q2 2013q3

25

27

28

Source: Own calculations based on seasonally adjusted Eurostat data

Pharmaceuticals remains the only sector with higher

output than the first quarter of 2008 in most Member
States; motor vehicles and chemicals also have a high
number of Member States with higher output than
before the start of the recession. At the other extreme,
in basic metals, fabricated metal products, other nonmetallic mineral products, textiles and wearing apparel,
production is below 2008 levels in virtually all Member
States.

The growth in motor vehicle manufacturing is also

evident in Figure 3, which shows the development from
November 2012 to the same month 2013 (vertical axis)
and from the first quarter of 2008 to November 2013
(horizontal axis) for each EU28 manufacturing sector. It
illustrates that although motor vehicles production has
grown faster than any other manufacturing sector in
the twelve months from November to November, it is
still not back at its pre-recession level.

Poland and Lithuania remain the Member States with

the highest number of manufacturing sectors producing
above their pre-crisis levels, whereas in France all
sectors are still producing less than in the first quarter of
2008.
Applying a switching-regime model to the matrix of
national manufacturing sector outputs, it is possible to
predict how the share in Table 1 will evolve. By the end
of 2014, the share of national manufacturing sectors
with output above pre-crisis levels is expected to be
37%. While considerably higher than in 2013, it means
that in nearly two-thirds of all sectors output will not yet
be back at its 2008 level by the end of this year.

Figure 3: Most manufacturing sectors growing year-onyear

Looking at some of the EUs most important trading

partners, US manufacturing output was 2.6% higher in
December than twelve months before and capacity
utilisation was 1.6% higher than a year ago.2
Chinese GDP growth has slowed to 7.7% per year and
the World Bank expects it to stabilise around 7.5% in
2015 and 2016.3 Last year, the Purchasing Managers
Index for Chinese manufacturing started and ended the
year marginally above 50, having reached an 11-month
low of 47.7 in the summer. In December it stood at 50.5,
down from 50.8 the month before.4 In Japan, the
evolution of manufacturing PMI was remarkable in 2013:

Source: Own calculations based on seasonally adjusted Eurostat data.

In fact, in November 2013 only four EU28 sectors were

producing more than before the recession (upper right
quadrant) while most manufacturing sectors were
producing more than twelve months before but less
than in early 2008 (upper left quadrant).

Turning to the matrix of manufacturing sectors across all

Member States, and in particular the share of national
manufacturing sectors with higher output than at the
start of 2008, the share has increased from 25% a year
ago to more than 28% in the third quarter last year:

Federal Reserve statistical release (2013), G.17, Industrial production and

capacity utilization. Press release 17 January 2014.

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World Bank Global Economic Prospects, 14 January 2014.

HSBC China Manufacturing PMI, 2 January 2014.

PMI increased each month except July, ending the year

on an all-time-high of 55.2 in December.5

Figure 5. Stability on metal futures markets

From a global perspective, because metals and minerals

are important inputs in manufacturing and construction,
world prices of metals and minerals can be used as a
leading indicator of global industrial activity. Changing
prices can give an indication of the future development
of international industrial activity.
Figure 4. Metals and minerals prices ending low in 2013

Note: Prices are in USD/tonne. Copper prices are on the left axis and
aluminium prices on the right axis. Future settlement dates on horizontal axis.
Source: London Metal Exchange.

International demand for EU exports has so far compensated for weak domestic demand in the EU. In fact, EU
exports to the rest of the world grew slightly faster
than US or Asian exports from 2010 to March 2013,
when the growth came to a halt, temporarily at least. At
the same time, US and Asian exports have continued to
grow. Japanese exporters, on the other hand, are still
struggling with the aftermath of the 2011 tsunami.

Source: World Bank Global Economic Monitor (2010=100)

Prices rose sharply until the first months of 2011 but

have since fallen back (Figure 4), a possible indication of
a future slowdown in the international economy. These
indications should however be interpreted with caution
as price movements may reflect not only demand
expectations in the related downstream sectors but also
other factors on the respective raw materials markets,
such as demand shifts outside the EU, or speculative and
supply factors.

Figure 6. EU exports growth petering out?

Expectations of increased global manufacturing activity

will, other things equal, lead to increasing futures prices
of metals. Three-month future contracts in copper and
aluminium have been relatively stable for several
months, at a lower level than in 2012 and early 2013
(Figure 5). As in the case of Figure 4, caution is
warranted in the interpretation of Figure 5, notably as
regards international speculation and supply.
Note: Asia (except Japan) includes China, Bangladesh, Burma/Myanmar,
Cambodia, India, Indonesia, Laos, Macau, Malaysia, Mongolia, Nepal,
Pakistan, Papua New Guinea, Philippines, Sri Lanka, Thailand, Vietnam, Hong
Kong, South Korea, Singapore and Taiwan.

Subject to these important caveats, the price movements in Figures 4 and 5 do not confirm the tentatively
positive signals found elsewhere.

Source: Own calculations based on CPB and Eurostat data (2010=100).

Looking ahead, exports are expected gradually to lose

their role as the main engine of EU recovery, as pent-up
domestic demand becomes a more important driver.
This is consistent with the development seen in Figure 5

Markit/JMMA Manufacturing PMI, 26 December 2013.

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in the second half of 2013. A similar shift is expected to

take place in China as a result of announced reforms to
increase domestic consumption and rely less on export
incomes.

The Coe-Rexecode IESR turning point indicator presents

a similar picture. After March 2013, when it was still well
above the 0.5 threshold, it has remained relatively stable
between 0.18 and 0.27 (Table 2). This supports the view
that the euro area recession is over.

Short-term expectations of DG ENTR sector experts are

mixed: for steel and chemicals the outlook is quite
positive; for pharmaceuticals, engineering and
metalworking it is neutral; while for food, copper and
aluminium it is mainly negative. In the latter three
sectors, the outlook for employment is especially
pessimistic. In the steel and chemicals sectors, new
orders are expected to go up (Figure 7).

Table 2. Turning-point indicator firmly in safe territory

2013

May

Jun

Jul

Aug

Sep

Oct

Nov

IESR

0.27

0.21

0.19

0.19

0.18

0.20

0.18

Note: The IESR indicator is probability measure of recession entry/exit for the
euro area. It is based on a Markov switching regime model applied to several
economic time series. Values above 0.5 indicate risk of euro area recession.

Figure 7. Short-term outlook in selected manufacturing

sectors

Source: Eurostatistics 1/2014

The forecast for EU28 manufacturing in the first months

of 2014 is for gradual growth along the lines seen since
late 2012 (Figure 9), but at a less rapid monthly rate than
the +1.5% monthly growth reported in November 2013.
Figure 9. Growing EU28 manufacturing production
foreseen in first part of 2014

Source: Own calculations based on questionnaire replies from DG ENTR units.

The Eurogrowth indicator, a leading indicator for the

euro area, continues to improve. The latest update is the
third consecutive increase, reinforcing the impression
that growth in the euro area will strengthen in 2014
(Figure 8).
Note: The forecast (green) is made for the period December 2013 to April
2014, using a bivariate VAR model including manufacturing output and
manufacturing producer prices.

Figure 8. Better outlook for the euro area in 2014

Source: Own calculations based on Eurostat data (2010=100).

Note: The bars represent changes from the same quarter the previous year.
Source: Euroframe.

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quarters. Moreover, compared with the previous

quarter, an increase of imported food prices was
registered, confirming the trend started in 2010. Total
food and drink imports decreased, whereas exports
increased compared with Q2 of 2013, generating a
positive EU28 trade balance of 6.3 billion. However,
the EU market share of global food and drink exports has
decreased compared with previous years. With regard to
R&D, the EU food and drink industry is characterised by
lower investments than other EU manufacturing
industries, and lower than food industries in other parts
of the world. According to the latest data available,
investments in R&D in EU food industries remain stable
at 0.53% of total food and drink turnover. The lack of
completion of the EU single market for food in some
specific fields may undermine the development of the
sector. Nonetheless, growth opportunities could be
derived from future free-trade agreements involving
OECD and emerging economies. Moreover, it is noticeable that the industry stresses the need to favour an
enhancement of the sector-specific industrial policy with
a view to supporting competitiveness in the EU single
market and worldwide.

Sectoral Overview
Chemicals
There is a broadly shared perception that the main risk
factor to the chemicals industry stems from the fragility
of the EU economic recovery (particularly in the
automotive and construction sectors, whose demand is
of critical importance to the chemicals sector). The
volatile oil and naphta prices cause further uncertainty,
along with speculations over the effects of the sharp
decrease of gas prices in the US due to the availability of
shale gas. Given the strong international competitiveness of the EU chemicals sector, a notable source of
growth in 2014 is seen to come from export markets.
Mechanical engineering and metalworking
Despite the increased confidence for 2014, we do not
expect substantial improvement, as long as there is not a
rebound in the internal market of the EU. In a number of
engineering sectors, EU companies are doing well on
export markets, but competition is extremely tough on
international markets. Many companies are still
struggling to make a profit.

Aluminium
Due to uncertainty over Chinese demand, metals
endured some tough trading in 2013. Unlike other
sectors, aluminium has never really recovered from the
meltdown in 2008. Despite strong demand from certain
sectors (aerospace, automotive, renewable energy
technologies, etc.) aluminium prices decreased in 2013.
The downstream sector profits from low prices but
depends in part on the recovery of the construction
sector. Primary aluminium smelters suffer from high
electricity prices, causing some plants to close down in
2013. With continuing high electricity prices and the
phasing-out of long-term supply contracts, more primary
aluminium smelters are at risk of closure. Finally, metal
scarcity and scrap exports remain an issue to be
followed.

Pharmaceuticals
The European pharmaceutical industry remains a key
asset of the European economy, being one of Europe's
top performing high-technology sectors. It is however
facing serious challenges, especially given the budgetary
restrictions imposed by the current economic situation.
In addition to the issues related to the need of ensuring
the long-term sustainability of public finances, a major
risk is represented by the development of parallel trade
as a consequence of the fragmentation of the EU
pharmaceutical market. Moreover, Europe is facing
increasing global competition, especially because of the
rapid growth in the market and research environments
in emerging countries such as China and Brazil. The
geographical balance of the pharmaceutical market
could shift towards emerging economies.

Steel
All in all, the EU economy, having turned the corner in
the second quarter of 2013, looks set to see its recovery
consolidating in the remainder of the year. For 2014 a
moderate recovery is on the cards, owing to a positive
contribution from investment and private consumption
in combination with further gains in foreign demand.
Construction output may rise by around 1% in 2014. The
outlook for 2014 is for a cautious recovery in automotive
industry production. Prospects for a 2014 rebound are

Food
The food industry output growth for Q3 of 2013 in the
EU was positive (+0.45%) after a period of negative
growth in the previous quarter. Even though the
industry remains a leading employer in the EU, a slight
decrease in the employment index of the EU food and
drink industry was recorded, for the second time in two
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quite robust for mechanical engineering. The improved

outlook for EU investment in machinery and equipment
will be supportive of a recovery in domestic demand. In
combination with improving demand from major tubeusing sectors such as construction, automotive and
metal goods, as well as some inventory replenishment in
the distribution chain, it is expected to result in a rise of
steel tube production of around 3.5% in 2014. The
improving economic framework in 2014 means that real
steel consumption will start to feel the pull from the
expected rebound in activity of the steel using sectors in
the EU. On balance, real steel consumption in the EU will
rise almost 1.5% in 2014. The outlook for 2014 exports is
for a slight increase in volume in line with the expected
rise in global steel demand.
Copper
The International Copper Study Group, an intergovernmental body, predicts demand to rise by 4.4%,
but a much higher increase in output will see the surplus
widen to 632,000 tonnes. That surplus is reflected in
copper price levels, which have decreased by 13.6%
since the beginning of 2013. In the next few quarters,
there should be more clarity concerning China's demand
for copper, which is expected to influence prices on the
London Metals Exchange. Copper smelting operations
could benefit from low copper prices, even though they
strongly suffer from high electricity prices. The sector is
also concerned about the business impacts of ongoing
regulatory initiatives on safe exposure levels to lead and
occupational exposure to copper particles.

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Policy Analysis

for spectators attending an event and for those enjoying

it elsewhere.

Economic impact of EU sports activities

Because of these three areas of innovation, sports technology has become a leader in various fields of applied
science: textile technology, mechanics of human motion,
new materials, sensors, actuators, human-oriented
design, and more. Thanks to the symbiosis that exists
between sports and other sectors of the economy, sport
innovations often spill over to other sectors (and vice
versa), thereby benefiting the entire economy directly
and indirectly.

Vice-President Tajani and Commissioner Vassiliou

recently hosted, for the first time, an informal meeting
of high-level representatives of European sports-related
industries to discuss the economic impact of sports in
the EU.
Based on studies and material prepared for the informal
meeting, this note looks at sport activities as a driver of:
innovation
value added
job creation

Value added
Using a broad definition of the sports industry which
includes not only the sport activities as such but also the
upstream industries producing goods and services
needed for sport activities, as well as the downstream
activities for which sport is an import input, the direct
value-added effect of sport in the EU27 has been
calculated to amount to 174 bn, with the breakdown
between manufacturing, construction and services
shown in the figure below.

Innovation
The sports industry is closely linked to innovation, both
in the sense that it depends on innovation and by
triggering innovation which would perhaps not otherwise have come about. Innovations flow in both
directions: sports benefit from breakthroughs in other
sectors (textiles, aerospace, electronics, etc.) while at
the same time giving rise to innovations that are
subsequently taken up in other sectors.

Breakdown of EU value added generated by sports

The most obvious reason why sports and innovation go

hand in hand is the need to enable athletes to produce
better results. Whether in training or competition,
athletes constantly try out new methods, nutrition,
materials and products. The high stakes involved creates
an innovative climate in which the latest research results
are turned into prototypes for testing on the field, while
at the same time innovations from other sectors are
adapted to the needs of athletes.
A perhaps less obvious area of innovation concerns the
need to ensure that the rules of sport are properly and
fairly applied, for instance by referees and in the context
of doping controls. Here there is a growing trend
towards computer-assisted tools to enable decisions to
be as objective as possible. The input comes either from
advanced computer vision and pattern recognition, or
from sensors embedded in clothes, balls or other
equipment.

Source: Own calculations based on Study on the contribution of sport to

economic growth and employment in the EU

The lions share of the value added generated by the EU

sports industry is in services. This is not surprising
considering that such important inputs as health and
education are part of the upstream activities, and
tourism (hotels and restaurants), broadcasting, betting
and trade are in the downstream part of the sports
supply chain. In fact, the eight most important sectors in
terms of value added are all services. The full list of
services sectors involved in the supply chain of the
sports industry is presented below, by order of
magnitude of value added generated.

A third area of innovation is related to the desire to

make the spectator experience as enjoyable as possible,
whether the event is attended in person or followed
from a distant location (typically on TV). The need for
information and customisation is more or less the same
irrespective of where the spectator is situated, whereas
needs such as comfort, safety and security are different
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Services sectors by value added

The value added discussed so far ( 174 bn) includes
direct effects only; within the supply chain of the sports
industry. There are also indirect benefits arising from
positive spill-over effects between the industries in the
sports industry supply chain and other industries. These
indirect effects are of the order of magnitude of
120 bn, which means that the total value added
generated in the EU economy amounts to 294 bn, or
close to 3% of the EU total. Most of this, 137 bn, is
generated in or around upstream industries, followed by
108 bn generated in or around downstream industries.
Actual sport activities (operation of sport arenas,
swimming pools, skiing and skating facilities, sport clubs
and so on) generates relatively little value added by
comparison: 49 bn.
In terms of where in the EU it is generated, the top
Member States by value added are Germany, UK,
France, Italy, Austria, and Spain. In a number of Member
States, including Belgium, Sweden, Slovakia and
Bulgaria, the value added generated by the sports
industry represents a relatively small fraction of the total
economy.

Source: Own calculations based on Study on the contribution of sport to

economic growth and employment in the EU

The value added generated in manufacturing ( 21 bn)

and construction ( 3.2 bn) is nominally smaller by
comparison, but still important in terms of the business
and employment it represents, as well as in terms of
innovative capacity (which tends to considerably greater
in manufacturing than in services). The value added
generated in construction and the various manufacturing sectors in the supply chain is illustrated below.

Value added by Member State

Manufacturing and construction sectors by value added

Source: Study on the contribution of sport to economic growth and
employment in the EU (NB. Croatia not included in the study)

Job creation
Sports-related employment in the EU is estimated to
amount to more than 7.3 million: 4.5 million directly
employed in the supply chain and 2.8 million in related
industries outside the supply chain. Twice as many are
employed in upstream segments of the supply chain as
in downstream segments. Actual sport activities
(operation of sport arenas, swimming pools, skiing and
skating facilities, sport clubs and so on) generate around
10% of the total number of jobs in the industry.

Source: Own calculations based on Study on the contribution of sport to

economic growth and employment in the EU

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The jobs generated represent a higher share of total EU

employment than the share of total EU value added
generated by the sports industry. This means that the
sports industry is more labour intensive than the EU
economy as a whole, and consequently that growth in
the sports industry generates more jobs than the same
growth in other parts of the economy.

Member States with a higher share of direct employment in the sports industry than the EU27 average are
Luxembourg, Austria, Germany, Finland, Slovenia,
Estonia, Cyprus, Denmark, Slovakia and the UK.

In addition, each new job in the sport industry supply

chain (direct employment) generates, through multiplier
effects, 0.65 new jobs outside the supply chain (indirect
employment).

The Short-term Industrial Outlook is prepared by a team from the unit Economic Analysis and
Impact Assessment in DG Enterprise and Industry. The team is led by Tomas Brnnstrm.
This publication does not necessarily reflect the views or opinion of the European Commission.

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