European industrial recovery picking up speed

Domestic demand has emerged as the decisive driver of economic activity in Europe and prospects for growth in 2016 are on the horizon, according to a report from the MAPI Foundation, the research affiliate of the Manufacturers Alliance for Productivity and Innovation.

The semiannual European Industrial Outlook provides analysis and forecasts for 12 major countries—Austria, Belgium, Czech Republic, France, Germany, Hungary, Italy, Netherlands, Poland, Spain, Sweden, and the United Kingdom.

“The European economic recovery is on solid ground, with domestic demand growing robustly in virtually all countries,” said Kris Bledowski, Ph.D., director of economic studies and report author. “Manufacturing is expanding more quickly in Europe than in the U.S., driven increasingly by pent-up consumer demand and a growing appetite for investment goods. We forecast a marked acceleration in spending on business equipment and a moderate uptick in construction outlays in 2016 and 2017. Although manufacturing activity is growing at a slower pace than services, business indices point toward a much faster pace of industrial production growth and should end 2016 about 2% higher.”

The core Central European Big Three of the Czech Republic, Hungary, and Poland are expected to be the manufacturing growth leaders in 2016. Poland is forecast to advance by 5.1%, Hungary is expected to grow by 4.9%, and the Czech Republic is anticipated to increase by 4.4%.

Poland is defying expectations of an imminent slowdown. GDP is slated to advance 3.5% in the next two to three years, faster than previously envisioned. One reason is that productivity is unusually high, supporting higher wages, which in turn stimulate consumption.

Hungary’s boom is coming to an end but with a soft landing. GDP growth is slowing from a rate of nearly 4% to 2.2-2.5% predicted in the next two years. Manufacturing is sustaining its impressive expansion of about 6-7% in real (inflation-adjusted) terms on the strength of a few sectors such as autos and its supply chain. Other industrial segments are in growth mode but at lower rates of expansion.

Manufacturing in the Czech economy is on an upswing, with industrial output advancing at over a 6% clip. Investment spending is booming and consumers are flush with extra income that they are willing to spend. GDP, however, will decelerate to the 2-3% range in the next two years after having topped 4% in 2015.

All 12 countries in the report are expected to see industrial production growth in 2016, led by Poland at the high end and the United Kingdom at the low end with 1.5% growth.

“Virtually the entire continent is now growing, although regional differences persist,” Bledowski said. “Looser lending standards, combined with a promise of low interest rates for months to come, offer a strong incentive for companies to invest.”

Bledowski, however, offers a caveat.

“Risks to the baseline scenario include a possible breakdown of consensus on refugees, Russia, TTIP, China, or the Middle East, which would sap investor confidence,” he cautioned. “In addition, the re-emergence of the Greek default is simply a matter of time; the country’s debt sustainability problems have not been solved but merely pushed aside for political expediency.”