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February 20, 1999

9 Min Read
Global injection molding economics: How is the rest of the world doing?

Editor's note: Whether you are molding at one location or many, you are no longer molding in isolation. Competition comes from plants all over the world, either from other plants within your organization, international companies, or the molder down the street who also has a plant in Singapore or Ireland or Guadalajara. IMM asked our economic expert (and the author of our monthly economic index), Agostino von Hassell, to take a look at world molding markets.

What will injection molders around the globe see in 1999 and beyond? Overall, we believe economic conditions will improve, albeit slowly. Asia's turmoil appears to have hit bottom, and key economies there report modest upswings. Everywhere else, matters appear, at the very least, to be stable.

Yet some troubling spots remain. Japan's drag on Asia's growth may very well continue as that country struggles along reforming its battered economy. Major markets such as Brazil, India, and Eastern Europe will start their slowdown soon or, in the case of Eastern Europe, continue to operate under depression-like conditions. Most troubling of all, we believe the United States will enter into a very brief and mild recession that will affect exporters around the globe.

Projecting the global economy is a delicate task. Economic data are typically three months old or older-in some countries economists have to make projections based on year-old data. The result is that each forecast has to be looked at with considerable care. Sudden and unforeseen events could easily change the course charted here.

As stated before, many key markets for injection molded products do move in line with the general economy. This includes markets such as packaging, housing and construction, industrial machinery, toys, and consumer goods such as appliances. No surprises are expected in these areas, and molders around the globe can project growth in these areas more or less in tune with their home economies' courses. Note, however, that historically these injection molding markets have outperformed GDP growth by at least half a percentage point.

Trends for Injection Molders
For a handful of very significant markets, other forces are at work that, overall, seem to favor them with growth rates far higher than the rest of the molding business: electrical and electronic products, medical products, and, somewhat of a surprise, automotive parts.

Even though more than half of the world's economy has been in recession, or at least stagnant, while the balance had very modest growth, these three markets did rather well.

Over the past twelve months-this report is being written in early January 1999-we see global output of molded electrical and electronic products jump almost 12 percent; automotive parts grew by a very respectable 6.3 percent in that period, followed by medical products returning a 5.4 percent global growth rate.

Why?
The key here is that demographics, along with living standards, are generally on the upswing (even factoring in such economic basket cases such as Indonesia). Global population growth may have slowed just a bit, but the percentage of older people is growing rapidly, increasing demand for medical products. Generally, rising living standards boost markets for cars and trucks as well as a host of electronic products. Today few countries come close to the level of computer usage as seen in the United States and Japan. Major countries in Europe, Asia, and South America have enormous growth prospects for electronics.

Does this mean molders in underperforming markets-such as in Thailand or Indonesia-are best served by switching to the manufacture of other, faster growth products? While each individual situation differs, molders should be very much aware that successful molding shops serving the electrical and electronic, medical, and automotive markets have a substantially higher capital investment requirement. We have heard an example from Australia in which a molder compared the capital investment requirement per Australian dollar of sales of drinking cups made of polystyrene and caps and closures for use on medical containers. The result was that the base investment required for the medical product is 2.3 times the investment that is required for cups.

What follows are some specific highlights for key global economies, data which are also summarized in Table I. We are concentrating this report on Europe, where the impact of the new currency block is to be measured, and developments in Japan. Will that country resume its role as the economic locomotive of Asia and Pacific markets?

European Union
The EU Commission now projects a GDP growth of 2.4 percent in 1999 for the EU15 (an assemblage of 15 countries) and 2.6 percent in the Euro-Zone (consisting of 11 nations). These forecasts are sharply down from those issued earlier.

The EU blames the turbulence in Asian markets and the crisis in Russia, which have provoked a slowdown in world growth from 4.1 percent in 1997 to less than 2.0 percent in 1998. International trade is also weaker on a global basis, growing in 1998 just 3.5 percent, down from the 9.7 percent rate seen in 1997. The EU, along with economists around the globe, projects increased growth for 2000 and beyond.

The arrival of the Euro is unlikely to have any tangible effect on international trade. It may, however, lead to considerable consolidation of manufacturing operations in Europe, with the medium-sized German molders a prime target for acquisition.

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These data are based on a range of sources: the International Monetary Fund, the European Union, the Federal Reserve of the USA, OECD, the United Nations, and various government sources.

While the growth percentages for Europe are rather modest, the very low inflation rates enjoyed across the continent make the growth prospects far more inviting. Together, the EU's countries' annual inflation rate in September was 1 percent, the lowest since Europe-wide measuring began in 1996.

France, Germany, and Italy-discussed below-account for about 75 percent of the total output of the Euro block. That means growth there will impact all of Europe.

As projected in Table I, industrial output has started to slow as Europe enters 1999 at a slower growth period. German industrial output grew just 2.1 percent in September, and Germany's factory orders dropped .5 percent in September. In Italy, industrial production rose a very modest 1.4 percent in September as declining export opportunities cut into growth. Annual growth for 1998 is now pegged at about 1.6 percent-barely above last year's rate of 1.5 percent-and the government openly discusses the chance for a recession in 1999. France's economy grew 3.1 percent in 1998 and then will slow to just 2.6 percent in 1999.

Britain, which is not part of the Euro block, sees growth for 1998 at 2.5 percent and a drop to 1.3 percent in 1999. A brief recession is also seen for the first half of 1999.

Japan: More Recession
At best, Japan's economy will have shrunk just 3.3 percent in 1998 and will decline only an additional .9 percent in 1999. Only in the year 2000 will growth-at a slow 2.1 percent rate-resume. At fault is the lack of a political consensus to deal rapidly with persistent banking problems and low consumer spending.

Japan is critical to Asia as it accounts for about two thirds of Asia's total output of goods and services. China is of note right now only as a major exporter. China's growth slowed in 1998 and may increase to as much as 8.0 percent in 1999 or slow to 4.1 percent, according to two conflicting forecasts issued by the World Bank and the United Nations. We believe higher growth is more likely.

For the very first time in 25 years, Japan's major industrial companies are reporting losses-a measure of just how harsh the economic climate of this island nation has become. Corporate profits are probably the worst since the early 1970s when surging oil prices threw Japan into recession.

Even though Japan exports less to the rest of Asia, exports to key markets such as the United States, Canada, Europe, and South Africa have grown sharply. Japan's trade surplus has grown, as of September 1998, to more than $27 billion, and Japan's current account surplus was 1.15 trillion yen in August, up from a low of 32 billion yen in January 1996.

One positive development for molders is that Japanese-made plastics processing equipment is less costly today. This makes it somewhat easier to invest in new productive capacity.

The United States
This country-which accounts for a solid third of the world's GDP-has become increasingly the destination of last resort for exported plastics parts, mostly from Asia. The image of full containers arriving in U.S. ports while empty containers are stockpiled is an accurate one, and the U.S. is likely to experience trade deficits in the $20 billion/month range, up from about $14 billion/month in early 1998.

The U.S. economy may very well slow early in 1999-some even project a recession. Note that manufacturing output in the United States as of October 1998 had declined for six consecutive months. Exports are down, and the vital consumer spending market-seen as very strong for the Holiday season-is anticipated to slide in the first quarter of 1999.

The result is few export opportunities for molders around the globe. A Thai company molding components for vacuum cleaners says the United States represents our "entire market," and any slowdown could be "devastating."

Trade Tensions
Molders around the globe are likely to find themselves right in the middle of growing trade tensions. With the fear of an overall worldwide economic collapse fading fast, governments in Europe and North America are again looking hard at what to do about waves of imports that batter their domestic parts makers.

In Europe, we anticipate moves by the EU to tighten import restrictions on automotive parts and consumer goods early in 1999. On a case-by-case basis-depending on how vocal the domestic European molders become-duties could potentially be hiked for imported products such as packaging products and toys.

It is less clear what the United States will do on the trade front. Most bet there will be little or no government action and there will be efforts to avoid moves such as the recent decision of the U.S. steel industry to claim dumping by importers.

On the other hand, grumbling in the United States over sharp increases in machinery imports may again lead to some form of trade action.

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