China, investment reluctance restrain European manufacturing recovery: ING
Easing inventories and interest rates, as well as strengthening consumer purchasing power in Europe present an opportunity for some manufacturing sector recovery in 2025, but multiple longer-lasting concerns will restrain growth, says ING Bank.
Consumer goods demand in Europe remains sluggish due to the inflation-induced income shock, while the economy is stuck in a low-growth environment and eurozone investment is well below its pre-pandemic level. Policy uncertainty plays a major role too, the bank points out.
Structurally, the energy shock is still keeping energy-intensive production muted, while weak demand outside of the eurozone is impacting new orders in the manufacturing sector. Local producers have, moreover, been hit by competition from Chinese export growth to the eurozone.
Although there was a sharp inventory reduction in the first and second quarters, this comes on the back of far greater increases in the years before. Before the summer, the destocking seemed to coincide with an increase in new orders but since then, overall order books have been deteriorating, ING observes.
There are nevertheless questions over whether inventories need to decline before production picks up like in previous years. Due to supply chain disruption and geopolitical turmoil in recent years, the “just in time” model may be replaced by the “just in case” model, where companies hold onto larger inventories to be less vulnerable to supply chain shocks. The typical inventory cycle may not apply in the current uncertain climate of globalised production.
The green shoots of recovery in Europe are complicated by the expected soft landing in the US economy and continued growth problems in China, which should keep foreign demand suppressed. “Add to this the ongoing structural worries with investment reluctance and policy uncertainty, and it is almost impossible to see a vigorous rebound of eurozone industry,” ING says in a note sent to Kallanish.
The changing growth model in China is adding to European industry structural decline concerns, with soaring Chinese exports putting pressure on certain industrial sectors such as automotive. Higher energy price volatility, meanwhile, could limit the recovery in energy-intensive sectors, while skilled labour shortages remain a concern as the workforce ages.
“There is light at the end of the tunnel, but it is very faint right now,” ING concludes.
Adam Smith Poland
