Spotlight: European Manufacturing Outlook

Manufacturing output returns to growth

Economic overview

Covid-19 has created mass disruption to global supply chains during 2020. Early disruption during lockdown included shipping vessels being stranded at sea, unable to enter Chinese ports, although most of the European port authorities remained fully operational during this time. Nevertheless, this had a huge knock-on impact on product availability in Europe, as consumers stockpiled on necessity goods and held off on discretionary spend during the March/April lockdown period, ultimately adding more pressure on the already undersupplied European logistics market.

The pace to which consumer confidence and retail sales recover will be essential. Discretionary spend is undergoing an initial positive rebound as lockdowns are gradually lifted, but the extent will be influenced by the long term impact on consumer finances and real incomes, which could involve a lull in retail sales during early 2021. More evidence on how successful the furlough schemes have been at maintaining employment levels is likely to be revealed by the middle of 2021.

Eurozone industrial production fell by over 20% YoY during April and May 2020 and Oxford Economics subsequently forecast eurozone manufacturing output to contract by 11% in 2020 before recovering by 8.4% in 2021. However, this is still above the 15% contraction in output recorded during the global financial crisis (GFC) in 2009.

July’s eurozone manufacturing PMI reading has since rebounded to 51.1, indicating that the sector has returned to positive monthly output growth for the first time since January 2019, as lockdown measures are lifted.

Manufacturing investment and forecasting occupier demand

Despite the well-documented growth of the e-commerce sector, the manufacturing sector currently accounts for c14% of UK industrial take-up. Combining the manufacturing and automotive sectors, this amounts to a quarter of occupational demand.

Savills tracks private manufacturing investment as a lead indicator of warehouse demand from the manufacturing sector. The relationship in the UK shows a strong correlation between the level of manufacturing investment and warehouse take-up from the manufacturing sector (correlation coefficient 0.88, see chart).

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