In this episode of PSR PowerTALK, Christopher Bamforth, European Market Analyst for Power Systems Research, comments on his outlook for the European economy.
Transcript
Welcome to the PSR PowerTALK podcast, produced by Power Systems Research.
00:06 Emiliano Marzoli:
From Power Systems Research, hello, I am Emiliano Marzoli, editor of PSR PowerTALK. And today we’re going to discuss the economic outlook for Europe with Christopher Bamforth, our European Market Analyst.
00:22 Christopher Bamforth:
Hello Emiliano, uh, thanks for having me on the podcast today.
00:26 Emiliano Marzoli:
Hey sure, Christopher.
So 2020 was quite a challenging year for Europe, well for the entire world in fact, with the COVID pandemic and its devastating effects. How do you see the European economic outlook today?
00:42 Christopher Bamforth:
Uh, yeah, you’re right. 2020 was indeed a very challenging year. Uh, a very uncertain year. Incredibly difficult to predict what was going to happen.
And many of these difficulties are still here today, although the situation is a, is a lot better. Legal and social restrictions still are required to curb the spread of the pandemic. We still have a few countries on lock down, Uh, depending on the severity of the of the actual pandemic. And we also have to consider the global impact of US and other elections and the Brexit supply chain constraints that we’ve been having and all these are contributing to some business disruptions.
01:23 Emiliano Marzoli:
Yeah, so, you know, in the first quarter of 2021 we, we actually saw a pretty strong demand. Uh, perhaps even stronger than, than expecting during these uncertain times. And, uh, what are the effects that you see from this strong demand?
01:42 Christopher Bamforth:
Uh, yeah, for sure. Demand has been increasing, uh, probably much higher than what a lot of people had anticipating, and this is having a, a stimulating effect on the economy.
However, in the first quarter we were seeing a lot of supply chain struggles to keep up, slowing down production and creating slightly longer waiting times. Uhm, this has stunted the potential growth that we could have seen during these first few months.
Mixing in the fact that, although demand is very strong, there’s still a lot of uncertainty over the next few months. Uhm, you know a second wave, sorry, a fourth wave or, or things like that. Uhm, these reinforced a U-shaped recovery. And the increased business activity is going to remain strong and will continue to grow throughout the year into a full recovery within the next couple of years.
02:39 Emiliano Marzoli:
That is, that is good to hear, but I are you saying, uh, the industry might not be prepared to take advantage of, of the strong demand today?
02:49 Christopher Bamforth:
Well, like I said, I mean 2021, in the first few months, was, was slow at first compared to what it could potentially have been. But we’re already seeing the production of machines picking up and matching the growing demand. Furthermore supported recovery plan and stimulus packages from the European institutions. Some of the 2020 challenges, uh, still need to be addressed regarding new powertrain technologies, new operating processes that have emerged due to the COVID regulations. Some some have changed in the industry and will continue to stay.
03:26 Emiliano Marzoli:
Do you think that the European industry is ready to keep up with these changes?
03:32 Christopher Bamforth:
Uhm, for sure. I mean Europe is amongst the leaders in terms of innovation and adoption for next generation of clean renewable energies. In fact, (some) we’ve seen many electric prototype test sites and early adoption by governments and institutions.
The best example of this, or an example of this, is the municipal operations in some parts of the Netherlands are already using electric vehicles. Many alternative fuel test sites are also being found across Europe. And this is really going to help us understand how these machines and renewable energies are going to work in order to be optimized to efficiently compete against diesel.
04:14 Emiliano Marzoli:
That sounds, uh, it sounds very exciting. It’s true that it’s a, it’s a, it’s a lot of change in sight.
Uhm, if we take, uh, what happened in 2020, can, can we use past year as a base to forecast for the coming years?
04:31 Christopher Bamforth:
Well, not really. I mean 2020 was an anomaly. And it’s really slowed down the pace of the growth in the economy. We will recover to pre 2020 levels within the next few years. We already expect 2021 to be a lot better than 2020. Uhm, so we have improved some of the issues.
For example the increase in telecommunications between players in the industry and major innovation and adoption process. Many reported very successful interaction between industrial participants and OEM’s that put a lot of emphasis on staying available to clients in their time of needs through, uhm, you know the, the Internet and telecommunications.
05:11 Emiliano Marzoli:
So Chris, you’ve mentioned some government stimulus packages before. Can you talk about them?When are they going to kick in?
05:20 Christopher Bamforth:
Ah yeah, so the, the largest ever European stimulus package, of €1.8 trillion to repair the economic and social damage caused by the coronavirus pandemic, was already agreed by all three the European Parliament, the European Commission, and EU leaders, last December. And this plan is very ambitious — not only to help rebuild, but to also build a more modern and sustainable Europe; focusing on research, innovation and climate change, and digital climate and digital transactions, preparedness, recovery, resilience to health risks, uh, in order to mitigate further pandemic damage. And there’s also much attention brought to modernizing and streamlining agricultural policies and the climate change.
06:06 Emiliano Marzoli:
Sounds brilliant, really. Can we be data optimistic for the Brexit as well?
06:14 Christopher Bamforth:
Well, Brexit is, a, is kind of tough. Although we, we avoided the worst case scenario, which was the no-deal Brexit, many questions remain. The agreement is so extensive and covers so many different situation and there’s a little too early to say for sure if this is a universal good deal. Furthermore, there seems to be many requirements that both parties must comply with. Which, again, in this early stage is difficult to predict whether or not it will hold.
06:42 Emiliano Marzoli:
Yeah, so Chris, uhm, you know if we look back one year ago when, when the COVID pandemic started, we, we forecasted three potential recovery scenarios. It sounds like we are hinting towards the best case. And the agricultural segment, for instance, one of the most robust markets, would put production and demand staying high in the current crisis. Can you tell us a little bit more about this sector?
07:13 Christopher Bamforth:
For sure. I mean, food demand is always going to continue to be strong as a necessity, and even if the current situation persists, uhm, is the base for only a moderate decrease compared to other segments that have been more severely affected by the Corona-virus. The European Agricultural Machinery Association barometer, has been posting increased expectations regarding the business climate for their members for the next six months. And this has been increasing over the last several months, which attests to some early recovery. They report increased business activity over the last quarter of 2020. According to our (base) database, OE link, was expected to steady recover up to 9% in 2021 and up to 7% in 2022.
08:00 Emiliano Marzoli:
We might see even better, better results there, but is it fair to say that the construction market is posting robust figures as well?
08:10 Christopher Bamforth:
Yeah, for sure. The demand is heavily professional, uh, which helps keep the demand high even if, uh, the situation worsens. And the market will be targeted by investments, both public and private, to stimulate the economy. Increased spending. This will help contribute to its remarkable recovery from the disruptions of the COVID crisis and help reach new heights after ten consecutive months of expansion.
08:36 Emiliano Marzoli:
I would imagine those 1.8 trillions of, of packages are going to help the construction segments.
Uhm, what’s going on in the industrial segment?
08:46 Christopher Bamforth:
Uhm, well the industrial segments, although we’ve seen a, an increase in online spending for industrial products, we expect demand for forklifts to remain especially strong. However, they will not alleviate the downshift as much industrial products will decline.
Thankfully, overall demand is heavily commercial, which would mean a decent recovery. But some of the parts, as some of the market linked to other markets, will see some different recovery rates across different products. Overall averaging out at about 10% for the next couple of years.
09:21 Emiliano Marzoli:
So we got, uh, resiliency in food production. Construction segments seems that it’s ready to bounce back and e-commerce is growing. We still need to move these things around and I know that medium and heavy trucks had really a tough year in 2020. Do you see it recovering this year?
09:45 Christopher Bamforth:
Yeah, so the first half of 2020 medium and heavy truck registration in Europe declined by 43% compared to the first half of 2019. And at the same time bus registration also went down by 35%. While we believe demand has stabilized, our sales are expected to, uh, be down significantly over last year.
10:08 Christopher Bamforth:
Export demand has also declined sharply this year, primarily due to the impact of the coronavirus on the global markets. But despite all this, Q4 2020 was very strong and the supplier chain remains positive. We expect production and demand for medium and heavy vehicles to ramp up during Q1 of 2021 and stabilize during the rest of 2021, remaining in between kind of 2019 to 2020 volumes.
10:37 Emiliano Marzoli:
And, uh, it seems also that there is electrification gaining some ground in these in these segments, or am I wrong?
10:46 Christopher Bamforth:
No, no, you’re, you’re right on target, Emiliano. Electric vehicle technology is taking a hold in Europe and primarily in the transit bus segment. However, most of the major OEM’s have introduced plans to introduce electric trucks during the first few years.
Higher upfront costs though, and the lack of charging infrastructure will limit electric trucks to short distance applications such as like refuge, pickup and delivery, and some regional whole applications. And the barriers such as the cost, and the weight, and the charging infrastructure, will need to be overcome before some significant adoption will be seen in the uh, in, in the additional segments such as long haul.
11:28 Emiliano Marzoli:
So Chris, uhm, if we speak about electrification, we, we have to talk about passenger cars, because that’s, that’s where it’s happening, isn’t it?
11:38 Christopher Bamforth:
Yeah, that’s right. I mean 2021 is a mark in the introduction of many electrified models across most of the EU manufacturers. To not say or to address the environmental concerns of European governments and to boost their sales to help recover from a devastating 2020 as the worst hit segment. However, recovery here will be very slow and we expect demand to stay low because of the crisis.
We saw some recovery starting during the summer; but it was lower than expected. And OEM’s increased, or announced increased investment in electrification and battery production in Europe to try and help tackle costs a little bit.
12:16 Emiliano Marzoli:
Well, with all these electrified vehicles, we should think about power generation a little bit. What’s happening in the genset markets?
12:24 Christopher Bamforth:
Well, this segment was already experiencing a slowdown due to its sensitivity to regional economics. And we’re going to see that slowdown highlighted by the current pandemic.
The customer, the consumer segment was particularly hit hard during 2020 and we expect it to recover very slowly. We expect a slight recovery to be fueled, though, by data centers. Key markets will remain strong, however it’s unlikely to be strong, to be a strong comeback. The likely increase in infrastructure spending also could have a positive impact on the recovery starting around 2021 and consolidating in 2022.
13:02 Emiliano Marzoli:
So Chris, uhm, another aspect to consider is that with increasing smart working, home working, it’s going to, to boost, to favor the diffusion of residential gensets in Europe.
Lastly, if we look at recreational products, motorcycles, scooters, I don’t suppose this is going very well with all the pressure that COVIDs putting on consumer demand and reducing comes.
13:29 Christopher Bamforth:
Well actually, after a dramatic decline in Q2 2020, motorcycles and scooter registration and production recovered extremely well in Europe, closing at 5% compared to 2019, which shows really strong resilience.
In the last few months we’re seeing an increase in personal use of two wheelers as an alternative to public transport, which has seen the sales of scooters and motorcycles increase unexpectedly. This is, however, not enough to offset the overall decline of the segment itself; but allows the segment to limit the effect of the downturn and will help return to pre COVID levels sooner than expected. In fact, according to OE link forecast, we expect this segment to recover already in 2021.
14:10 Emiliano Marzoli:
It’s true that in the first three months of 2021 we have seen, uh, very strong sales in key markets like Italy and France.
Well, Christopher, thanks a lot. That was really insightful and we look forward to hearing your European update again next quarter.
14:32 Christopher Bamforth:
Yeah, thank you very much, Emiliano. It was a pleasure.
14:34 Emiliano Marzoli:
Everyone, much of the data for this report has been pulled from two of the major Power Systems Research databases. OE Link, the database of OEM production and forecast data, and EnginLink, which provides engine production, forecast, and specification data.
Look for these reports every month in the PSR PowerTALK News email report and on this podcast.
15:01
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