At the annual MTA Forecast Seminar yesterday, delegates reflected on a tale of diverging economic prospects over the next couple of years, with the US economy slowing but only heading for a soft landing. Growth in other advanced economies is expected to be more resilient, although Asia is usually stronger than Europe.
The industry picture is different with some countries already in a recession for this part of the economy, with the main question being around the timing of the rebound. In general, this will start in 2025, but the pace of the recovery varies, with the Euro-zone and Japan running ahead of the UK, while the US is at a different place in the cycle.
Our new forecasts and the presentations from the seminar can be downloaded from the Members Area of the MTA website at https://www.mta.org.uk/members-area/market-intelligence.
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Following our usual pattern, the first presentation by Ben May, Director of Global Macro Forecasts at Oxford Economics, covered the macro-economic situation in a world where economic cycles have become partially uncoupled. He began discussing whether the US economy is heading for a recession, although the conclusion is that the negative signals that are driving this view are being caused by factors that mean they are something of a false flag for the economy.
Meanwhile, growth in Europe is weak and likely to remain so through 2025, despite a modest acceleration. Growth in the emerging economies which is naturally faster than in advanced economies, will also moderate slightly next year, thanks mainly to China.
Turning to the UK, the forthcoming budget is obviously a key determinant of what is likely to happen in the short-term. The new Government has to deal with the implausibly tight spending plans of the previous government; part of the solution could be a different way of considering public debt (indeed, this was trailed yesterday by the Chancellor), but some increases in taxation seem inevitable. One possible positive for our industry could come from changing the fiscal rules so that the current account is in balance while borrowing covers investment; there is potential for this switch to actually allow for an increase in investment spending which would feed through into a benefit for the manufacturing sector in various ways.
In summary, the macro-economic outlook is for steady growth with the US economy slowing to a soft landing, while other advanced economies will see more resilient growth. Factors such as greater inflation volatility, uncertainty over the neutral rate and fiscal policy will encourage steady and sustained reductions in rates in 2025.
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The second session, led by Jeremy Leonard, Managing Director of Global Industry Services at Oxford Economics, moved the story on to focus on the industrial structure of the economy, with a particular focus on manufacturing. Recent data on industrial production has been flat on a global scale and, bearing in mind the usual growth in China, this implies falling output elsewhere, with Europe the main source of the weakness. While earlier forecasts had predicted a recovery this year, it now looks more like a transition year with the expansion phase moved into 2025.
While growth has been sluggish in many parts of the world, it is Europe which has seen the most significant downturns in output. In part, this is a reaction to the economic changes after the Russian invasion of Ukraine, with higher energy prices making some industries (perhaps most notably chemicals) uncompetitive; this was exaggerated because the US, with its extensive domestic oil and gas resources, did not see the same level of input price increases.
Historically, industrial production grew more rapidly than GDP and, after a reversal of this pattern in 2022 and 2023, the trends have evened up this year and “normal service” looks likely to be resumed in 2025.
Having covered the country trends, he turned his attention to the sectoral picture – another area where there is a divergence of prospects for next year. The strongest growth is likely to be in high-tech goods (electronics), but the aerospace and machinery sectors, which are important to our forecasts, are also likely to do well. The weakest growth within manufacturing is likely to be the automotive industry where consumers caution, despite falling interest rates, is likely to hold back demand in an industry which has worked through its order backlogs.
At the top end of the growth patterns, the aerospace industry will be supported by significant order backlogs in the civilian side of the sector, while orders for military aircraft are growing in an increasingly uncertain global world. The more interest rate sensitive industries such as machinery will benefit from lower interest rates, although this may take a little longer to feed through into sales, not least because of the natural gap between orders and deliveries.
The UK has a particularly large degree of variation in the placement of the key industries on the economic cycle. Despite this, the industrial recovery has been leading that in Europe.
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The final session, presented by MTA Statistician, Geoff Noon, drew all this background together and linked it to our new forecasts, both the for the UK market (machine tools and cutting tools) and in the Global Machine Tool Report. However, he began by pointing out that although the latter of these is mainly focused on the prospects for the machine tool market, for those companies in the tooling part of our sector (or other products where the customers output is the main driver of demand for your products), this document includes tables with output forecasts for the nine user industries and in the 26 countries covered by the report.
Starting with the global picture, he used this to illustrate two factors which need to be considered when looking at these forecasts. While looking at individual countries, readers should use their own currencies although any aggregation, either at a regional or global level, needs the use of a common currency – usually US$ in this report. As an example, he pointed out that in Yen, the trends for the Japanese machine tool market are +14.1% in 2023 and -11.4% in 2024 but in US$ terms the changes are +6.7% and -17.0% respectively.
The other key issue is around inflation; although this has moderated recently, it persists in some countries. All of the forecasts are expressed in nominal prices and high levels of inflation can explain apparently large changes; the example here is Turkiye where growth forecast to be +42.5% in the Turkish machine tool market measured in local currency for 2024 has to be seen in the context of the producer price index for industrial goods increasing by +51.1%.
The global machine tool market is expected to contract in 2024 by -2.1% (based on a weighted average of the trends in national currencies), with a modest positive trend in Asia (the largest region thanks to China) being outweighed by more significant weakness in Europe and the Americas. Growth is forecast to resume in 2025, with a particularly significant rebound in the US market that will be particularly susceptible to the timing of the recovery, especially in the context of the US election results.
Turning to the UK forecasts, sales in the first half of 2024 have been stronger than we had anticipated, which has turned our previous expectations of a small reduction in the market into a forecast of growth of +6%. However, the balance to this is that with a higher starting point, we have halved the forecast growth rate for 2025 to +5%, with a similar level predicted for 2026. In contrast, the cutting tool market looks to be on target to record a decline of -5% this year, with limited growth of +2% to come in 2025 and 2026.
The revisions in the UK’s economic data which are released between the compiling of our forecasts and their publication at the Seminar, have been relatively modest this year, so there is little impact from that source of adjustment to the forecasts. The changes arising in the UK macro-economic outlook (which is updated monthly) between the September and October outlook have also been relatively modest; to the extent that they would affect our forecasts, the outlook for output and investment have been upgraded slightly for 2025 but are a little lower in 2026, especially for output.
Among the drivers of the machine tool forecast, investment expenditure has been on a generally positive trend since the pandemic and given a recovery in intentions from the CBI survey in the first half of the year, this looks to be a positive indicator (the latest data was published yesterday – see the article in economic news); however, against this, the indicator of capacity utilisation has been falling, especially on a 4-quarter moving trend, so the indications here are mixed.
For output, the expectations for 2024 have been revised up in the context of a stronger than expected performance in the investment goods industries; closer analysis shows that this is mainly in the automotive industry (where the UK has outperformed the sector in Europe), with metal products also running ahead of our expectations in the Spring Update.
In concluding, Geoff highlighted the issues facing the UK automotive industry which, with its focus on the production of internal combustion engines is exposed to the move towards electric propulsion. On the other hand, continued growth in the aerospace industry looks almost guaranteed given the extensive order backlogs on the civilian side of the industry (which are only worsened by Boeing’s current difficulties) and the UK’s relative concentration (compared, for example to Germany) in the military aspects of aerospace.
You can download the latest forecast documents – the MTA Forecast Report for the UK market for machine tools and cutting tools and the Global Machine Tool Forecast and its associated tables – and the presentations from the Seminar from the members area of the MTA website at https://www.mta.org.uk/members-area/market-intelligence. While we have added notes to the Manufacturing Technology presentation, the two from our colleagues at Oxford Economics are only the bare slides but we will be adding speaking notes to this and will let you know when these are available.