BRUSSELS, BELGIUM (December 1, 2003)- Last year at this time, in common with most other forecasters, we expected to see modest growth this year. In truth, this year remains flat over last year with little indication that there will be anything more than a minor, almost immeasurable change in the markets for powered equipment. In the first half of this year the contribution to GDP change from the agriculture and construction sectors has been zero indicating that these two sectors have been flat. It looks like this year will be a 'standstill year'.

GDP growth this year in the European Union is expected to be as little as 0.5% - with the Euro-zone at around half this level. Compare this to the USA at 2.5% and Japan at 3% and it is clear that Europe is lagging behind in the climb out of the recession of the last few years. With both France and Germany, which together make up nearly 40% of the total EU GDP, exceeding the Euro-zone maximum budget deficit of 3% of GDP, there is little room for special fiscal policies to stimulate the economy. Nevertheless, Germany remains the largest exporter of machinery which a share of 19% and beat the USA on the total value of exports in August 2003.

In 2004, the EU will expand by admitting 10 more countries. These are mainly in Eastern Europe and their accession is expected to stimulate the economies in both the current EU and these candidate countries. We believe that demand for both construction and agricultural equipment will increase in Eastern Europe as a consequence.

So what does this mean? Most economic observers seem to agree that next year will see some growth, although forecasts are continually being reduced. It now looks likely that GDP growth in the European Union will be less than 2% in 2004. This will give little scope for any major increases in demand for powered equipment, although with increasing exports, the European equipment industry could build as much as 5% more product than in 2003. Lets take a closer look at the individual markets to see what we might expect.

Agricultural Equipment

After several years of falling sales European demand for agricultural equipment appears to be nearing its bottom. A fall this year of around 2% should be followed by a similar increase in 2004. Any recovery will be slowed by the changes in the Common Agricultural Policy that will see less income for the larger arable farms that consume the bulk of the equipment. This is expected to be most marked in the demand for large tractors and combines. The relatively good harvests in Europe have to be offset by crop failures in other parts of the World. So when we consider the demand that will be experienced by European manufacturers, it looks like they will have to wait until 2005 before they see any real growth.

Construction & Industrial Equipment

This year looks like finishing with this market sector off by as much as 9% after a similar decline in 2001. Infrastructure projects appear to be on hold while the further move towards equipment renting has meant that fewer machines are needed to do the same work. As GDP grows it is expected that more major infrastructure projects will be commissioned increasing equipment demand. There also appears to be significant latent demand resulting from the enlargement of the EU and reconstruction in the war-torn regions of the World. An increase of activity of around 5% should be expected next year with a larger increase in 2005.

Generator Sets

With excess inventory built in 1999 and 2000 for anticipated rises in demand, 2001 and 2002 have been very bad for the power generation manufacturers. This inventory is now working itself out of the supply chain and it is expected that this year will end at around the same level as 2002. The anticipation of high demand for temporary power in Iraq has meant that any remaining excess inventory has been shipped to that region, clearing the warehouses for a more normal production year in 2003. It is expected that 2004 will be 4% up with a further increase of 9% for 2005.

Light Commercial Vehicles

Light commercial vehicles suffered less than their heavier cousins over the past few years with the market off only half that of heavy trucks. This year looks like it will be flat or a slight increase - maybe 1%. For next year we expect to see it up to 7% higher on the back of increased economic activity with some 'pull forward' ahead of tightening emissions levels for 2005. There should be a similar increase in 2005 bringing the volume up close to levels that existed prior to this recession.

Medium & Heavy Commercial Vehicles

With demand very weak in Germany and the French market still in recession, it is clear that this year at best will be a standstill for Western European manufacturers. The first quarter did show some promise with a 3% increase over 2002 but since then demand has fallen to a point that at three quarter distance the market is no better than flat. There is every indication that we are now at the bottom of this latest 'bust' phase and recovery should now be the order of the day. But I fear that it will take some time to reach the heady days of the late 1990s again. We are off close to 20% from those levels and with perhaps 5% increase next year and a further 7% in 2005 the market will still be well down. Increased demand in 2005 ahead of the introduction of Euro IV emissions standards might give a further impetus to the growth in demand. However, this is merely 'pull forward' volume and any such increase will be reflected in lower demand in later years.

In Summary

It is becoming clear that 2003 is a transition year with all sectors except construction and industrial close to level with 2002. This means that we should be able to look forward to growing markets for the next few years as the World economies get back to more traditional GDP growth levels. Our forecast is that the equipment manufacturing industry in Western Europe is probably going to see a volume growth of around 5% overall compared to an estimated decline of 1% this year. This should be followed by a further and better growth in 2005, which we expect to be around 7% or more!

Health Warning

Everything these days seem to have a health warning - and this is no exception. The World's economy is so fragile that many things could de-rail the return to growth. Terrorism, the Middle East situations, North Korea are just a few that come to mind. However, if we can get a quiet year on this front, then we are set for good growth in 2004, and maybe the economy will be robust enough for continued growth in 2005 and beyond.

Power Systems Research is a global market research and consulting company specializing in the engine, original equipment, and components industries. Since the company was founded in 1976, Power Systems Research has been the authoritative source of market information and business intelligence to the power products and drivetrain industry. Power Systems Research is headquartered in St. Paul, Minnesota and provides market data and customized project work to the world's leading vehicle and equipment OEMs and component suppliers. The company has a global presence with operations in Detroit, Brussels and Tokyo. Further information is available at http://www.powersys.com.