This report is excerpted from the Q3 2019 Update Bulletin prepared for clients of Power Systems Research, Oct. 1, 2019.
SUMMARY. If you were to look at the latest global macro-economic fundamentals, you would see a strong and healthy economy and a rosy picture. On the other hand, if you follow the latest updates on key industries and their players worldwide, optimism is not that strong.
Furthermore, the outlook is rather cautious and reserved. Yes, some industries are better than others, such as Industrial vs. consumer focused. We notice a common feeling of uncertainty present and primarily related to outside factors. Global geo-politics, Middle East, China, Brexit, global trade tensions and tariffs have all contributed to this situation and have added uncertainty to global growth.
Fundamentally, major markets in European and North America still enjoy record low unemployment, historically very low interest rates and low inflation. However, over the past few months conditions have turned south and the growth in these areas is losing its steam. While key economic indicators remain very healthy, we do not expect any significant growth in these areas.
With the growth of economic uncertainties, we expect to continue to see rapid shifts in political situations and money capital between industries and markets going forward.
When our analysts study current and future market trends, we do not speculate on rumors or proposed future policies—although we consider their possible effects–so we have not made any significant changes in our projections related to escalated global trade tensions and economic disagreements. However, we do expect weaker global economic conditions in the near term; thus, our current forecast and growth rates already reflect this situation and the trend.
Proposed global trade policies will certainly have an impact on current markets and future growth; however, these changes will not be immediate and will depend greatly on the outcome of such policies in the long run. Furthermore, the tone of the latest discussions on global trade policies are projected to gain political capital in the short term. Based on that, we do not expect any major economic policy changes to take place in short or medium term.
Although 2019 still shows a strong performance overall vs 2018, during the past three months, we have seen a stall in continuous growth and even minor declines in key indicators around the world and across industries.
As we look at Q4 2019 and into 2020, we have slightly adjusted our previous forecast to be even more cautious and conservative vs the outlook in previous quarters. We do not expect any major acceleration in growth for the next 6-18 months.
Most markets still are showing modest growth rates vs 2018, but we see a slowdown in growth dynamics. The North American economy is still strong; however, there are many warning signs to sustain future growth, and a slowdown could be on the horizon within 6-18 months.
During the next few years, we will see increased growth and adoption of new technologies such as autonomous driving and electrification. Some markets will adopt these new technologies quickly, which will disrupt some industries, including established market shares. Key segments that will experience the most rapid change will be Lawn and Garden, On-Highway and some Recreational Products.
AGRICULTURAL. Global machinery production for the Agricultural sector is expected to decline 5.4 % in 2019; the forecast is down slightly (by 0.3%) from our projection in Q2 2019. The key contributing region to the global decline was North America where we have seen significant declines in some product categories. This trend will continue in 2020, slipping overall at 2.5%. This decline is mainly due to the replacement in China of 2-wheel drive tractors with larger HP machines.
Globally, we do not expect any rapid recovery or high growth, mainly due to current economic conditions, ongoing trade rhetoric in the segment and record low commodity prices. We forecast the recovery will be very slow at 1%-3%, and the market will not reach its prior high levels in the foreseeable future.
CONSTRUCTION. The global Construction sector performed very well over the past couple of years, posting an overall growth rate of 8.9% in 2018. The key region contributed to the growth was China. On the other hand, some equipment seems to be losing ground in Europe.
Currently, we forecast global machinery production for construction markets to grow 0.9% in 2019, which is healthy, but slightly lower than the previous quarter by 0.5%. Next year (2020) is projected to be flat to positive, by 0.1%.
The mining sector looks encouraging. and increased infrastructure spending in the U.S. could drive this sector higher.
In terms of the overall economic cycle, we expect most developed markets to remain solid in Q4 2019. Within the Construction segment, we see Brazil, India and China showing very strong performance in emerging markets, and North American, European and Japanese markets supporting this trend. However, signs of a slowdown are on the horizon.
Other Off-Highway segments, such as Industrial, Lawn and Garden and Power Generation, will closely follow global economic trends.
For the On-Highway sectors we see a decline in production volumes across various products (with the exception of the LCV segment and Electric Vehicles). On the other hand, we continue to see development of EV technology and the introduction of multiple EV models across the board.
New electric models are planned to be introduced by most major OEMs. At this point, the overall volume for electric vehicles (both commercial and for personal use) is insignificant in terms of market share, but we already see rapid adoption of these technologies, and its growth will accelerate over the next 5-10 years.
Since the beginning of 2019, we have significantly updated our databases and increased our near-term projections and growth rates for electric buses as well as commercial vehicles. However, the baseline production volumes remain low in terms of overall market share for these applications. We project that these new technologies, if adopted by the market will have a significant impact and rate of change in 4-5 years and will continue to rapidly expand market share.
Demand for Medium and Heavy Vehicles is expected to slow this year and into 2020. Commercial truck demand in North America and portions of Eastern Europe is expected to be relatively strong for much of the year while most other regions are experiencing a slowdown.
PSR expects a continued slowdown in medium and heavy truck demand for most regions in 2020. Currently, a global recession is not forecasted but a cooling off is expected. According to IHS Markit, global GDP was 3.2% in 2018 and is forecasted to edge down to 2.9% in 2019 and 2.8% in 2020. These indicators align with what PSR is seeing in the global medium and heavy truck market. PSR
Yosyf Sheremeta is Director of Product Management & Customer Experience at Power Systems Research
