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The COVID-19’s hit on the eurozone manufacturing sector was sudden and dramatic. Manufacturing PMI fell to its lowest and sharpest in March and April 2020.
In France and Germany, the Euro Area’s “big two” economies, the index fell by an unprecedented 14.8 points between February and April to reach 33.7. The index hit even lower values among the rest of the eurozone, down to 33.6. The sector is faced both with a shortage of workforce, as labourers in manufacturing cannot work under quarantine regulations, and with limited raw material supply from affected sources, especially from China.
However, to claim that the eurozone’s manufacturing sector troubles are caused solely by the COVID-19 outbreak would be naïve. The sector has been in an almost continuous decline since the second half of 2018 when manufacturing GVA started to decelerate. The situation became only more severe throughout 2019 when the growth of value added in manufacturing fell in the negative zone and is close to slipping below 16% of the total GVA of all sectors for the first time since 2014.
A decline of 2.1% y/y in Q4 2019, the worst performance in almost seven years, cannot be explained by the pandemic which started affecting the global economy in January 2020 and reached Europe in the following month. Other macroeconomic indicators have also been moving in unison – manufacturing IPI and new orders have been posting negative growth since early 2019 and the same is also valid for industrial turnover. While manufacturing PMI never fell as spectacularly as in March and April 2020, it has also been decelerating constantly since December 2017 and has been below the threshold value of 50 since February 2019.
The logical question which arises is what is dragging down European manufacturing, if it is not the coronavirus. Most of the experts are pointing towards a very simple explanation – global trends. The trade war between the US and China, which was the hot topic before the COVID-19 pandemic, severely affected the eurozone industry, and in particular the EU powerhouse Germany. Slowdown of demand from China for German machine parts and cars drove the manufacturing sector to a recession in 2019. The uncertainty surrounding a Brexit deal which had lasted more than three years - from the referendum in June 2016 until the eventual UK withdrawal from the EU in January 2020 – also impacted the manufacturing sector. Eurozone manufacturers had to amend their business strategies to account for potential tariffs on traded manufactured goods, more bureaucracy and less demand for these goods.
The COVID-19 outbreak might not be the cause for the predicament of the eurozone’s industry but it might spell woes for the whole economy of the bloc. The year 2019 was a problematic one for the Euro Area economy but the troubles in manufacturing were compensated by resilient consumption and a strong labour market. The eurozone’s seasonally adjusted unemployment rate was 7.3% according to February 2020 data, equalling the lowest value on record. Wage growth had also remained robust. The pandemic, however, would certainly have a strong negative effect on employment and consumption and threatens to destroy the buffer that was keeping the Euro Area from recession. To protect the labour market from crumbling, the eurozone governments have initiated ambitious programmes to keep a lid on rising unemployment.
The Euro Area has been enjoying a prolonged period of declining unemployment. Since July 2013 seasonally adjusted unemployment ratehas been continuously falling to reach a historic low of 7.3% in February 2020, right before the COVID-19 epidemic started to spread rapidly across the European continent. Wages and salaries have been constantly increasing both overall and in the manufacturing sector, with Q4 2019 data revealing an increase of 3% and 2% y/y, respectively.
However, a sharp increase in unemployment is expected in Q2 2020. The quarantine imposed by the governments while battling COVID-19 is particularly harmful for companies in manufacturing, since most employees cannot work remotely. According to the European Automobile Manufacturers Association (ACEA), the pandemic is affecting at least 1.13mn European workers in automotive manufacturing alone, around half of which are located in the eurozone’s economic powerhouse, Germany.
The automotive sector is among the hardest hit by the COVID-19 pandemic in the Euro Area, as numerous factories were temporarily closed and output was severely affected. Motor vehicles manufacturing in the eurozone was already in dire straits prior to the outbreak, as industrial production has been shrinking for 18 consecutive months between August 2018 and February 2020. December 2019 was particularly bad for the sector as IPI plummeted by 18.3% y/y. The total industrial turnover of motor vehicles, trailers and semi-trailers declined by 2.1% y/y in January 2020 but the turnover slump on the eurozone domestic markets was even worse – by 2.7% y/y.
According to ACEA, as of April 28 2020, the top four eurozone economies have losses of 1.39mn motor vehicles due to factory shutdowns, with 602,900 lost in Germany alone. March 2020 saw the lowest number of new passenger car registrations on record – a mere 374,900. This is a drop of 59.7% y/y which is also unseen since the first data recorded in 1991. According to a press release of the Volkswagen Group, the eurozone’s largest automobile producer had a dismal first quarter of 2020 with deliveries falling by 23% y/y and sales revenue decreasing by 8.3% y/y.
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