In this episode of PSR PowerTALK, Christopher Bamforth, European Market Analyst for Power Systems Research, comments on his Q3 2021 outlook for the European economy.
Transcript
Welcome to the PSR PowerTALK podcast produced by Power Systems Research.
00:00:06 Emiliano Marzoli
From Power Systems Research I am Emiliano Marzoli, editor of PSR PowerTalk, and today we’ll discuss an update on the economic outlook for Europe with Christopher Bamforth, our European Market Analyst.
00:00:19 Christopher Bamforth
Hello Emiliano and thanks for having me on the podcast again.
00:00:23 Emiliano Marzoli
And thank you, Christopher. Very nice to have you back.
Since our last chat we have seen a positive outlook of the COVID pandemic across Europe. What changes do you see in the old continent compared to the beginning of the year?
00:00:38 Christopher Bamforth
Well, you know, the beginning of the year really closely followed the best-case scenario that we forecasted at the beginning of the pandemic in the early 2020. We started to see some positive effects from the vaccination rollout. This has allowed a potential relaxation in the restrictions put in place to combat the pandemic and its effects. This scenario is likely to continue down this road. However, as long as the pandemic could still be a health risk, it will continue to have a negative impact on the recovery. Uh, that kind of looming fear.
In the beginning of the second half of the year, though, we’ve seen the slight tapering off of the demand as we expected. However, the slowdown in the supply chain is proving to be a bigger hindrance than we previously anticipated.
00:01:22 Emiliano Marzoli
So, Christopher, you mean that we are going to leave a downturn in the end of 2021? Or is this just a small adjustment in the demand?
00:01:33 Christopher Bamforth
Uh, no, yeah this is, this is much more small adjustment in the demand and we’re seeing a slowdown in the demand, a slight tapering off, uhm, as I mentioned previously, which is a, uh, a combination between the seasonal end of year slowdown that we have kind of every year and, also, the fact that the demand is over, or not as high, as earlier in the year.
00:01:55 Emiliano Marzoli
Do you expect this trend to continue into 2022 or is this just something that will loom out and finish with 2021.
00:02:05 Christopher Bamforth
Well, we expect the, the demand to remain around this stage. It might pick up a little bit early next year, or, you know, halfway through the year it should pick up a little bit and then taper off slightly again, which is where we overall we see kind of a 6% growth forecast for next year. And this clip brings us a lot closer to, to the levels pre pandemic.
The supplier side should also gradually start evening out and getting back to normal; or at least growing enough to get to a break-even point. In the short term it’s still going to remain a big hindrance.
00:02:38 Emiliano Marzoli
Seems like 2022 might be easier on the logistics side and overall positive, maybe in the second part of the year.
The construction machinery is one of the key segments in our industry. Is it also facing some slowdown in this late part of the year? What do you think, Christopher?
00:02:57 Christopher Bamforth
Uh, yeah, we’re definitely seeing a little bit of a slowdown in this segment as well. Maybe not as much as we see in, in, in agriculture, for example, but we are still seeing slightly lower levels of demand. Although the market is still going to be heavily targeted by investment, both public and private, in order to try and stimulate the economy and increased spending. Although the supply side struggle was also present in this segment and, and we expect the recovery next year to be a little bit stronger over around 7% for 2022.
00:03:31 Emiliano Marzoli
What’s happening in industrial segments? I know it’s related to ag and construction; but what is your take there?
00:03:38 Christopher Bamforth
Yeah, well, we saw last time that the, the industrial segment was very fragmented and had some very heavy disruptions, especially on the supply side. Although, as the year progressed, we’re seeing a slightly better evening-out between the different products. This has created kind of a positive pressure on the market and it allows us to recover a little bit faster. So we actually expect this trend to continue into next year; so, we’ll see slightly stronger recovery of maybe just under 9% for 2022.
00:04:11 Emiliano Marzoli
Yeah construction, ag, industrial, we see a positive focus for all those segments. And commercial vehicles, trucks, and buses have also shown a robust performances. In the first six months of 2021 of this year the European medium and heavy commercial truck registration improved by a whopping 33.1% compared to the horrible first half of 2020. The order bookings are really strong thanks to an improved overall economy in, in Europe.
As you mentioned for sure there are some issues that we’re still facing, particularly related to supply chain disruptions. While the sourcing of semiconductors remain a problem, there is also another aspect to consider, and this is very specific to EU and it’s related to the proposal to extend the restriction on steel imports into EU. For the moment, the majority of the steel is sourced in the EU; however, there is a greater demand, particularly to filling the gaps that we still have and that, with the local supplier, cannot be met.
There is also another very, very peculiar issue; and this time is related to the UK and it’s one of the consequences of the perfect storm that is eating the island: the combination of the COVID and the Brexit. Because when you think about it, they happen at the same time.
And we’re seeing, basically, demand for 100,000 truck drivers in the UK. And in the past, before Brexit, this demand was filled by EU workers. But now, obviously, the decision is, is more complicated, as a matter of fact, and is affecting many sectors. Like, BP had to close some of their fuel service station because they could not guarantee the supply. Many shops and grocery stores are suffering with empty shelves. And, as a consequence, obviously, industry is lobbying the government to take action, to review the current work permit strategy, and to actually allow a easier application for truck driver.
It’s complicated because for the UK Government this would be going back on the original idea of the Brexit, to support the local workforce; but, at the same, time pressure is mounting and we are approaching Christmas and it’s obvious that it would be really unpopular to have a situation where consumers and, and British citizens cannot go shopping for Christmas.
00:07:00 Christopher Bamforth
Yeah, for sure.
00:07:00 Emiliano Marzoli
And, uh yeah, and, and so it’s a very complicated situation.
As it is, in any case, for the rest of the industry you mentioned several times supply chain constraints. And could you tell us a little bit more and do you think that many of the European players have been actually impacted and seen their performance is limited by this situation?
00:07:26 Christopher Bamforth
Yeah, so, so in order to try and describe this a little bit better, I I’d say there’s, there’s two layers to the supply side, right? There’s the, there’s the OEM to the buyer, which is the first layer and then the, the, the OEM to its suppliers which would be the second layer. At the store, obviously, we had issues on both sides.
Now what we see in is that the OEM to to buyer, uhm, is getting better. Obviously, you know, still not up to 100%; but, but it’s getting there.
The other side, the OEM to its suppliers, is still really lagging behind. And the main issue for this, I mean, I think we’ve mentioned a couple times, is the electric components and the requirement of chips. So that there’s a lot more requirement of chips nowadays than there was before and the, the production of these chips is what is really keeping the demand behind. So that, that’s, that’s the first issue that’s really slowing down the supply chain.
And the second issue is, is the factories being closed, especially in Asia and Southeast Asia, where some of these factories are still closed due to COVID regulations. And this is going to, this could take some time to come back online. So, in the very short term, it’s very difficult to see how we’re probably going to address these problems, but hopefully that will be able to be addressed as, you know, they reopen and, and the production starts up again.
00:08:45 Emiliano Marzoli
Chris, do you think that without these shortages of components, demand would have been higher, production of equipment would have been higher in Europe.
00:08:54 Christopher Bamforth
Well, the very simple answer is yes, uh, although obviously there’s a lot of things to take into consideration in terms of, like, production times and, and actually availability and things like that. But if, if there was not this, this shortage of chips, we could believe that, that production could have been even higher, and therefore, the, you know, the economy would have, uh, probably a little bit faster.
And also there’s a, there’s another intrinsical problem to this is the fact that a lot of the demand is not being met. So then, if, if you’re in that situation you have two choices, either you go see somebody else, or you, you actually source it from, from outside of Europe. And this, uh, actually, you know, you’d go somewhere else to, to get it filled. I mean, this is especially true for consumer products rather than commercial products; but, but these are definitely affecting the recovery.
00:09:43 Emiliano Marzoli
Yeah, they are, and uhm, you’re right, the, the answer is, is yes. Although it’s also true that with, with the current problem facing the, the, the, the cargo and the shipping industry, maybe even if we had the, the components, they might have not been able to deliver them anyhow.
00:10:01 Christopher Bamforth
Yeah, no, exactly.
00:10:02 Emiliano Marzoli
Let’s move on to, uh, the other big trend in Europe, which is electrification. Could you tell us something about this?
00:10:10 Christopher Bamforth
Yeah, so we talked about it a little bit last time; but, in the, since last time there’s a lot of things that have been happening. It’s moving extremely quickly, especially after the, uh, the recent discoveries and the warning signs that our CO2 emissions are causing serious damage to the planet.
The Paris Treaty is, is playing the vital role in the struggle, but it’s under fire because a lot of the, uh, is, is meant for 2050 and everybody saying that that’s just not quickly enough. So, there’s many new initiatives that are spawned around Europe and the UK, uh, focusing on, on short term goals; uh, you know, kind of 1-2 years to try and reduce our CO2 emissions even faster than that, to reduce our carbon footprint, and, also, to influence governments into spending, into putting more initiatives, for a faster switch.
We also, we see in this manifest in, in several different industry. Obviously, some are moving faster than others. For example, lawn and garden is moving a lot faster than agricultural, for example. Though this being said, it is very likely that, within the next couple of years, many of these incentives will help shape their different industries into a more renewable energy based production.
00:11:23 Emiliano Marzoli
You mentioned lawn and garden to be one of the segments that’s really been electrified. I assume that passenger car is also in the forefront of the curve.
00:11:33 Christopher Bamforth
Yes, of course. And also, we’re seeing a lot of these car manufacturers are starting to adapt some of their flagship cars into becoming also electric. The kind of idea in that is that eventually it will transition to only being electric; although right now you can still, you know, choose which engine you want inside. But, but these are just, you know, very heavy commitments to show that they are very serious about electrification and it’s a very likely outcome.
00:12:01 Emiliano Marzoli
Thanks Christopher.
I mean, it’s clear that we still have a longer road ahead of us before we can recover from the COVID pandemic and the consequent disruptions it created in the global industry. It’s also true that, for the moment, it’s moving faster than we might have thought. This is really following our best-case scenario, which is obviously good news.
We look forward to hearing, uh, your European update again next quarter.
00:12:36 Christopher Bamforth
Yeah, no problem. Thank you very much for having me.
00:12:38 Emiliano Marzoli
Yeah, super. And thanks to all the listeners.
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 forecasts data, and EnginLink — which provides engine production forecasts and specification data.
Look for these reports every month in the PSR PowerTALK news email report and on this podcast.
Thank you very much, again.
00:13:05
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