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When will Europe show manufacturing growth?

Article-When will Europe show manufacturing growth?

With the U.S. economy on a strong and sustainable rebound and Asian manufacturers showing profitable growth, attention must focus on Europe. The European economies have shown almost no tangible growth for some time, sliding in and out of essentially recessionary conditions.

Yet manufacturing growth in Europe, along with an improved overall economic climate, could help create new opportunities for plastics processors around the globe. As current conditions stand, strengthening the Eurozone economies will require enormous political will in the dominant markets: France, Italy, and Germany.

Shallow growth now

Plastics processors in Northern and Central Europe will face shallow growth for the next 12 months for two major reasons.

Processors—quite dependent on exports to grow output—are hampered by a very strong euro, which has been setting new valuation records. And these same processors also face the stark reality that lower-cost competition is emerging from the countries joining the European Union in 2004.

The strong Euro is a major problem: The United States buys about one-fifth of all goods produced in the Eurozone, and prices for these goods in U.S. markets increased about 18% in 2003. That is a bad foundation for growing exports.

Countries such as Poland and the Czech Republic have already set themselves up as a choice location for plastics processing, shipping manufactured plastic goods to highly developed Western Europe countries and the emerging markets in the former Soviet Union.

Poland, government sources there tell us, will target the United States as a premier export market for manufactured goods in the next few years. Poland''s plans are bolstered by its strong support of the United States in Iraq, plus the fact that it deployed troops there for occupation duties.

Promising data

The European Union''s data gathering agency, Eurostat, claims that the Eurozone economies as a whole grew by .4% in Q3 2003. Growth in Britain, which is not part of the euro but is a member of the Union, registered a rate greater than that.

While this is very modest growth as compared to the United States, China, and Japan, for the first time in two years none of the 15 economies that make up the Eurozone reported a contraction.

Major resin producers in Europe also report that shipments across the Eurozone were up about .6% in the third quarter. Orders for resin on hand allow resin makers to project plastics processing output growth of .9% in Q4 2003, and about 1.1% in Q4 2004.

For the Eurozone we project 1.3% to 1.5% growth in plastics processing in 2004. Countries with more flexible labor laws and less stringent regulations such as Denmark (which is not a euro country but has its currency pegged to the euro), Spain, Portugal, the Netherlands, and Belgium will see average growth of 2.8% in 2004.

The major threats confronting Europe''s economies focus on political uncertainties surrounding the future of the European Union and the growing conflict between the European Central Bank (ECB) and lead economies such as Germany and France.

Recent efforts to fully unify Europe under one constitution have failed for now. The result is that when the European Union enlarges itself to 25 members in June 2004, it will be a Union with many rules still unwritten. This will add to political and economic uncertainty.

Interest rates as set by the ECB are at a record low. But the ECB may feel pressure in 2004 to increase rates, which would impact negatively on consumer spending, capital investment, and the outlook for plastics processors. The pressure to increase rates is high—such a move is seen as the only proper tool to force Germany and France to go back to observing European Union rules that restrict deficit spending.

Meanwhile, the German Parliament on Dec. 19 approved a major economic reform plan, which has enjoyed broad support. The reforms—aimed at boosting short-term and long-term economic growth—include some major modifications in labor laws, as well as a major tax cut spread out over the next two years. How quickly Germany''s economy will gain traction remains to be seen, but many observers in Germany and abroad believe that it will provide a critical dose of optimism to encourage new investments. The other European nations will monitor these changes closely before adopting them.

Other key global trends

Plastics processors and suppliers to that market should keep these other developments in mind:

  • A free trade agreement reached in late December between the United States, Guatemala, El Salvador, Nicaragua, and Honduras could boost sales opportunities for plastics processors in those countries. The low labor costs in these Central American countries may provide U.S. manufacturers with an alternative to China.
  • New economic data show that the Indian economy is expanding in a very regular pattern, and that it is attracting a growing amount of foreign investment—which includes additional car manufacturing facilities. This naturally creates new market opportunities for automotive parts suppliers.
  • Resin prices on a global basis continue to rise. Even though the low value of the dollar should reduce resin prices somewhat in Asia, this has so far not been the case; most Asian currencies are pegged to the dollar. Other major exporters such as the European Union and Japan have seen their prices increase as a consequence of the respective strengthening of the euro and the yen.
  • Trade tensions between China and the United States, and between the European Union and the United States, will create problems for plastics processors for most of 2004 and 2005. The Bush administration is clearly embarked on a course—in part due to election-year politics—to seek out protectionist measures to gain votes from manufacturing workers. For instance, late in December the European Union announced plans to retaliate against the United States over a U.S. trade law—known as the Byrd Amendment—that directs to American companies an estimated $300 million per year in anti-dumping taxes. The EU was not yet clear on what kind of retaliation to the measure it plans; the measure itself has already been ruled illegal by the WTO.

Agostino von Hassell, of the Repton Group (New York, NY). Contact von Hassell at [email protected].

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