General Economic and Industry-Specific Conditions

 

Subdued outlook for the global economy, only moderate growth expected

The risks from the war in Ukraine and other potential geopolitical conflicts continue to cause economic uncertainty. Fiscal policy stimuli, which had massively supported the economy during the corona pandemic, are currently lacking. Compared to the situation at that time, the central banks have now tightened monetary policy to curb inflation, which has significantly increased financing costs for companies. This has reduced the economy’s willingness to invest and consumers’ willingness to spend. The high order backlogs are having a supporting effect on the industrial economy. The order backlog can now be worked off thanks to the improvement in the supply chains. However, according to the Kiel Institute for the World Economy (IfW), the declining order level will have a stronger impact on production in the future. As a result, the economic outlook for the middle of 2023 is cautious, with high risks at the same time. The International Monetary Fund (IMF) adjusted its forecast only slightly in July 2023. According to this, the global economy is expected to grow only moderately in 2023 by +3.0% (previous forecast: +2.8%). The emerging and developing countries are expected to grow by a total of 4.0%, the industrialized countries by only 1.5%, including the US at +1.8%. In the UK (+0.4%) and the euro area (+0.9%), only slight growth is forecast for 2023, according to the IMF.

 

German economy with a lot of headwinds due to high inflation and higher interest rates

According to estimates by the German Bundesbank, the economy will recover only laboriously from the crises of the last three years in 2023. One of the main reasons for this is the high level of inflation, which at 6.0% in 2023 is well above the central bank’s target of around 2%. In response to this, not only private consumption but also government spending will decline noticeably in 2023 as a whole. In contrast, however, fixed investment is likely to increase despite higher interest rates, as the investment projects previously piled up by the supply bottlenecks can now be implemented. In addition, the transition to more climate-friendly production methods as well as the energy and mobility turnaround are now triggering investment demand, which can be observed independently of cycles and interest rates. By comparison, the slump in construction, especially in residential construction, will weigh significantly on the economy in 2023. Against this backdrop, the Bundesbank forecasts that the German economy will shrink by 0.5% in 2023. In its summer forecast, the Ifo Institute expects a minus of 0.4% for 2023. The IMF also expects Germany’s economic strength to fall back in 2023 (-0.3%) and to improve only slightly in 2024 at +1.3%.

 

Mechanical and plant engineering: negative signs for 2023

The industry is currently still benefiting from a high order backlog. However, the pressure is gradually increasing due to the global economic weakness, the sharp rise in interest rates, the uncertain outlook for energy costs and supply and the geopolitical risks. Thus, it is very clear from the order books of the German mechanical and plant manufacturing industry in 2023 that demand is slumping. In the first five months, the drop was 14% in real terms. Further interest rate hikes cannot be ruled out for the coming quarters. The combination of sharply increased production costs and simultaneously rising interest rates is likely to continue to weigh on the propensity to invest in the medium term. Against this backdrop, the industry association VDMA expects mechanical engineering production in Germany to shrink by 2% in real terms in 2023.

 

 

Automotive construction remains on a recovery course – electric drives account for nearly one third of LV volume

GlobalData expects that the development of the automotive industry will continue to be burdened by bottlenecks, despite the improved availability of components, and thus demand cannot be fully met. Nevertheless, according to the experts, a robust recovery is expected in the global automotive market. Specifically, global production is expected to grow by 6.0% to 87.2 million light vehicles in 2023. However, the pre-crisis level is not expected to be reached again until 2024. GlobalData expects production to reach 89.6 million LV in 2024 (2019: 88.8 million). In 2023, the highest growth rates are expected in Europe and North America, where LV production is projected to increase by around 10% each. Looking at the individual drive types, it becomes clear that the production of traditional LVs with pure combustion engines is expected to decrease by 5.0% in 2023. In turn, the number of battery-electric LVs (pure BEVs and hybrid PHEVs) is expected to increase by 36.8%, so that their share of LV production increases significantly to 31.9% (2022: 24.0%). The market for commercial vehicles (CVs) is also expected to grow in 2023. According to GlobalData, commercial vehicle production is expected to grow by 7.3%, with double-digit rates expected for Europe and Asia. In contrast, production in North America is expected to stagnate in 2023 due to economic and interest rate factors. A decline is even assumed for the region in 2024.

 

Construction industry in China and Europe in a recession in 2023

China’s construction industry continues to show a weak development. The data from the NBS statistics office suggests a further significant slowdown both in the dominant segment of residential construction and in office and commercial buildings, even though the real volume of all building investments currently under construction is only falling moderately. This is additionally exaggerated by the high volume of completions. In contrast, new construction starts in the first half of 2023 plummeted by nearly a quarter (-24.3%), so this suggests weak construction activity for the coming months. The outlook for the European construction industry has also deteriorated further as a result of higher interest rates and construction costs. The Euroconstruct network (including Ifo) lowered its forecast slightly in June. Instead of stagnation in 2023, construction output is now expected to fall by 1.1% in real terms (West: -1.0%, East: -1.7%). Spain, Portugal and, to a lesser extent, France are expected to generate slight growth. By comparison, parts of Scandinavia and Eastern Europe, the Netherlands, Austria, Italy, the UK and Switzerland are expected to see a decline in construction output. A weak phase lasting several years is forecast for Germany, with a minus of 2.2% predicted for 2023 alone. The reasons include the fact that many new construction projects are being postponed or cancelled altogether due to a lack of profitability, and

thus new business is almost collapsing. The German Construction Industry Federation (HDB) therefore expects turnover to shrink by 6% in real terms in 2023 (2022: -5.8%).

 

US construction industry: Dampened by economic uncertainties and high interest rates - water management remains a growth market, driven by infrastructure measures

The positive development of the US construction industry from the previous year is now being burdened by rising interest rates. Mortgage rates rose to 7% as of July 2023 after several Fed rate hikes in the last 12 months. For this reason, the experts at FMI estimate that the industry will generate a much weaker increase in construction spending of around 3% as a result of the greater challenges (2022: +11%). FMI also expects the construction of single-family homes to suffer very significant downturns of 16% compared with the previous year. By contrast, commercial construction and building construction are forecast to perform well in 2023. The outlook for 2024 remains negative (-15%) in view of the rise in interest rates. This should also be reflected in investments in multifamily housing, office and commercial buildings, which are expected to turn negative according to current estimates.

The water supply sector remains one of the growth areas, with a forecast increase of 10% in 2023. This is supported by the massive investments in infrastructure, which are to continue in the coming years. The commercial segment is also expected to grow significantly in 2023 (+11%), while it is expected to contract in 2024 (-8%).