General Economic and Industry-Specific Conditions
Global economy at a solid level, but sustained recovery still not in sight
Although the main negative factors of the previous year have been mitigated, the global economy still grew more slowly in the first half of 2023. The high level of inflation, the monetary policy turnaround and the restrictive fiscal policy hampered development. On the one hand, the end of the COVID-19 pandemic restrictions in China provided positive impulses. On the other hand, the situation in the global supply chains eased. Another positive contribution came from the partial correction of the previously steeply rising energy prices. Nevertheless, industrial production in the US with relatively good capacity utilization (Q1 2023: 79.6%, Q2 2023: 79.4%) remained largely at the previous year’s level (Q1 2023: -0.2%, Q2 2023: 0.7%). The US economy grew at an annualized rate of 2.4% in the second quarter of 2023 (Q1 2023: +2.0%). In China, there was also no clear recovery in the country’s industry. While production rose only moderately by 3.8% in the first half of 2023, capacity utilization lagged behind the previous year (Q1 2023: 74.3%, Q2 2023: 74.5%). The general growth of the Chinese economy amounted to 5.5% by the end of June 2023 (Q1 2023: 4.5%, Q2 2023: 6.3%). The European economy, on the other hand, was hit by continued weak consumption. The economy stalled (Q1 2023: +1.1%, Q2 2023: +0.6%), which consequently had a negative impact on industrial production (Q1 2023: +0.5%, April: +0.2%, May: -2.2%). Nevertheless, capacity utilization remained good at 81.2% in the second quarter of 2023, although the level was lower than in the previous year (Q2 2022: 82.5%).
German economy at an absolutely low level and with little momentum
The German economy experienced a significant slump in the winter half-year 2022/23 and subsequently went through a technical recession. According to the IfW (Kiel), the absolute economic strength in the spring of 2023 was even below the level at the end of 2019 when the COVID-19 pandemic was imminent. The main reasons for this are the increased financing costs and the energy shocks triggered by the war in Ukraine. Energy-intensive production in particular was strongly affected. According to the German Bundesbank, investments, especially in construction, as well as foreign demand have slowed down considerably and high inflation has put the brakes on private consumption. Accordingly, GDP also decreased in the second quarter of 2023 by 0.6% (Q1 2023: +0.1%, revised), with the calendar-adjusted effect being only only 0.2% (Q1 2023: -0.2%). By contrast, pent-up order backlogs, some of which were still very high, had a positive effect, resulting in an overall increase in industrial production (Q1 2023: +2.1%, April: +3.2%, May: +2.2%). Likewise, capacity utilization in industry was high at 84.5% in the second quarter of 2023.
Continued high order backlog still cushions weak demand in the mechanical engineering sector
The industrial economy was in a state of tension in the first half of 2023: On the one hand, order backlogs remained high and there was a normalization in the supply chains. On the other hand, the demand dynamics showed a strong cyclical downturn. In light of this situation, the global production volume of industry (excluding construction) in the first five months of 2023 was only marginally above the level of the previous year at +0.8%. Growth rates gradually picked up slightly within this period compared to the weak start to 2023, however (Q1 2023: +0.5%; April 2023: +1.5%, May 2023: +1.0%). Notwithstanding numerous investments in climate protection and in the restructuring of the energy industry – which structurally supported the demand for capital goods – the propensity to invest was low in the first half of 2023 due to high uncertainties and deteriorating financing
conditions. As a result, machinery production in the US contracted compared with the corresponding period last year (Q1 2023: -2.7%, Q2 2023: -8.8%). According to the ECB, the capital goods industry has been very robust so far in the euro area (Q1 2023: +5.6%; April 2023: +8.3%). German mechanical engineering has also been able to increase its production so far, thanks to the continuing good order situation (Q1 2023: +3.2%, April +3.7%, May +1.6%), although the basis for comparison from the previous year was very low due to the war in Ukraine.
Global car production recovers significantly on a low level – electric cars boom
The automotive industry continued to recover from the massive impact of the COVID-19 pandemic in the first half of 2023. The easing in the supply chains and the high order backlog also had a relieving effect. According to the German Association of the Automotive Industry (VDA), the German and European passenger car markets in particular developed better than forecast, although the market level remains below the pre-crisis level in 2019. According to data from LMCA (LMC Automotive), global sales of light vehicles (LV, up to 6 t) up to the end of June 2023 were 10.7% higher than the previous year at 42.7 million units. Production also ramped up significantly, increasing by 10.4% to 43.0 million units (Q1 2023: +7.1%, Q2 2023: +13.9%). Among the different drive units, it was noticeable that the production of LVs with pure combustion engines declined slightly (H1 2023: -3.1%). In contrast, 48.7% more battery electric vehicles (pure BEVs and hybrid PHEVs) were manufactured than in the same period of last year. Their production share in the first half of 2023 was 31.6%, just under one-third of all LVs. Despite the weak economy and high interest rates, the commercial vehicle (CV) market also grew strongly in the first half of 2023, although the base one year ago was very weak due to developments in China. LMCA puts the global increase in commercial vehicle production to the end of June 2023 at +11.5%, representing a total volume of 1.71 million units. Production figures amounted to 1.59 million units (+10.6%) for trucks and 121,000 units (+25.6%) for buses.
Construction activity remains depressed in China and increasingly under pressure in Europe
The development of the Chinese construction industry continued to be under pressure from the real estate crisis there. Financial problems among project developers and falling property prices weighed on the sector. According to data from the NBS statistics office, building investment fell by 7.9% in the first half of 2023 (Q1 2023: -5.8%), while residential investment declined by 7.3% (Q1 2023: -4.1%). In Europe, the negative effects are increasingly visible due to the deterioration in financing conditions, which is reflected in residential construction in particular. Furthermore, construction costs remain at a high level, while incoming orders have been declining for several months. After construction output in the euro area had already gotten off to a very restrained start to 2023, posting a real increase of only 0.7%, the negative sentiment became increasingly entrenched in April (+0.4%) and May (+0.1%). The mood was particularly gloomy in Scandinavia, Austria and the large Eastern European markets of Poland and Hungary. In contrast, the trend in France was still moderately positive, while other countries such as the Netherlands, Spain and Portugal as well as smaller countries in Eastern Europe (Slovenia, Romania, Croatia) even posted significant gains. In contrast, the slowdown in construction activity in Germany, which had already been visible at the end of the previous year, continued. Accordingly, both construction output and revenue declined despite the persistently high order backlog.
Robust construction activity in the US despite weak development in the housing market - market drivers in the water business weaker in H2 2023
Despite some negative signs in the first half of 2023, the construction industry in the US was supported by the positive effects in public infrastructure construction. In the area of water supply alone, investments increased by 14.5%. Moreover, merely all construction segments recorded growth, even the construction of office and commercial buildings was moderately up. In total, US construction investments increased by 3.0% by the end of June (public: +12.3%, private: +0.8%). The rapid and sharp rise in interest rates caused a noticeable setback in the residential construction sector. Here, construction activity slumped by 10.4%, with the majority of the effect being attributable to the construction of single-family homes (H1 2023: -23.2%). Nevertheless, construction activity in the area of multi-family houses grew again by 21.1%.
NORMA Group's water business in the USA (NDS activities) correlates very strongly with the real estate market. Market drivers in this segment started to weaken in the second half of 2022 and have slowed further in 2023. Remodeling activity in the US, driven by project backlogs from 2022, started 2023 with an annual growth rate of 1%, according to the Zonda Residential Remodeling Index (RRI). Additionally, the real estate business in the US is impacted by extreme weather conditions: The Western US continued to suffer from a prolonged drought, but experienced the highest rainfall in a late winter/early spring in over 100 years in early 2023, which severely impacted the industry.