Delegates to the MTA Forecast Seminar this week heard an outline of a challenging year ahead, albeit a view with some mitigating factors in some areas.
Global Economic Outlook: Ben May, Director of Global Macro Research at Oxford Economics considered the question of whether we are on the cusp of a global recession with the conclusion that, depending on the definition used, the risks of a recession are finely balanced.
The global economy is expected to grow weakly over the next year; at a global level, a recession is defined as two quarters of growth lower than population growth (so negative GDP per head) and we have already had a minus figure in Q2-2022 thanks mainly to the negative contribution from China due to its Covid lockdowns. With these expected to ease in the 2nd half of this year, global growth returns despite a downturn in advanced economies. However, as the Chinese bounce-back fades we get another negative value in Q1-2023 and, just, in Q2 which would be a technical recession, but well within a margin of error on the forecast, so it is a 50:50 call.
While a recession in most of the advanced economies seems almost inevitable, these are generally expected to be mild compared to history, although with only a slow recovery to follow in 2024. Europe is the worst affected, largely because of its exposure to both the price and supply of gas and the 2nd/3rd round effects on inflation. While gas rationing can still be avoided this winter, much depends on the weather and the timing and pace of the subsequent fall back in inflation remains the great unknown.
Globally, Central banks are fully focused on controlling inflation and with this set to drop back only slowly, any reversal of monetary policy looks to be a way off. While rates are likely to level-off early in 2023, there is little sign of them coming down until 2024. The Federal Reserve is raising rates faster than in Europe, keeping the US$ strong and driving other Central Banks to keep rates high to avoid importing inflation through higher input prices in their own currencies.
Following the negative fiscal support in advanced economies over the last couple of years as the pandemic measures were unwound, a mild positive effect is expected in 2023, mainly from energy price support measures. In addition, the absence of large imbalances that can make a weak position worse makes a deep recession unlikely but the long-term trend for growth is on a downward trend. The main “known unknown” in the global outlook is inflation and how quickly this will fall back.
Overall with the Global economy set to stagnate over the next year, with recessions in advanced economies, although these should be shallow. Assuming that the current shocks dissipate, recovery will follow but it is likely to be muted at best.
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Global and UK Industrial Outlook: Jeremy Leonard, Managing Director of Global Industry Services at Oxford Economics then moved the story on to look at the implications for industry. His opening remarks noted that macro-economic recessions are normally exacerbated for industry and while this time around we are also likely to see an industrial recession, there are some factors that may mitigate this effect.
He noted that we are moving from a period where supply issues have been holding back industrial output to one where it is the lack of demand that is the problem as the global economy weakens. One side “benefit” of this weaker demand is that supply chain pressures are easing and the inventory situation in Europe has improved dramatically. Problems in the supply of semi-conductors had been concentrated in continental Europe, with the automotive industry most affected. With the worst of the semi-conductor shortages behind us, there should be an unwinding of the order backlogs which will counter some of the weakness in output during 2023.
Jeremy took some time to look at the automotive industry in a little more detail and, in particular, the impact of hybrid and electric vehicles on the demand for machine tools. With hybrid vehicles likely to be an important part of the market, at least in the next 5 years, the fact that they actually require a little more machining than conventional ICE powered vehicles helps to mitigate the move to pure electric vehicles which do have lower machining requirements. In addition, the move towards net-zero has positive impacts on demand in some end-user industries with, for example, the increased use of wind power.
The fall in operating rates arising from a global downturn suggests weaker capex demand ahead and rising interest rates virtually guarantee a decline in investment spending in 2023. For the UK, this comes despite healthy corporate balance sheets, although the machinery sector looks likely to out-perform the overall trend in the short-term, mainly as a result of the super-deduction scheme.
Aerospace has been lagging behind the other machine tool using industries but the recovery here continues as demand for flying continues to recover – indeed, domestic activity has reached pre-pandemic levels, although there is still some way to go for international flights (mainly long-haul, wide-body aircraft).
The UK industry forecasts in this report are from early-September and, for a variety of reasons which we explored later, they are likely to be too optimistic for 2023. The forecasts pre-date the most recent spurt in gas prices which offered a further negative impact for the energy intensive industries such as chemicals and, although this mainly affects Europe and its global competitiveness for future investment, the UK faces similar headwinds.
He concluded by looking at machine tool orders globally; these appear to be weakening but the backlogs will cushion demand weakness in 2023. Overall, machine tool consumption, measured by the weighted average of markets in national currencies, is expected to see modest growth this year and next with a modest acceleration in 2024. This year, it is Asia (mainly China) that holds back activity, with a significant weakening forecast for the USA in 2023; growth in Europe moderates but remains positive in 2023, largely due to the unwinding of order backlogs.
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Forecasts for Manufacturing Technology: In the concluding presentation from the morning, Geoff Noon (MTA Statistician) took delegates through the new forecasts both for the global machine tool market and the UK market for machine tools and cutting tools.
Before looking at the forecasts, he reminded the audience that there is valuable information for almost all aspects of the manufacturing technology spectrum with forecast for output in the global machine tool forecast which will be of use to those members whose demand from customers is driven by output rather than investment.
The first point made around the global machine tool forecast is that the reader needs to bear in mind how the data has been compiled. The best trends are those compiled using the weighted averages of the trends in the individual countries in their respective national currencies but if you want to compare trends and levels for the world or regions (and within those regions) you need to use a single currency. In most of the report where this happens, we have used US$ but this brings in the impact of exchange rates which have been significant in 2022.
Therefore, the global machine tool market measured in US$ is estimated to fall in 2022 before a modest recovery in 2023 (using fixed 2022 exchange rates for the forecast period); however, the weighted average trend shows modest growth of 4.6% for 2022, easing to +3.4% in 2023.
The other issue to bear in mind in assessing the forecasts is inflation. Until this year, this has not really been an issue, but with higher machine tool prices in reaction to increased input costs and the forecasts being in nominal prices, users of the forecast need to bear in mind that a 5% rise in the value of the machine tool market is actually a fall in volume if prices have increased by 10%.
The main risks to the forecast were outlined and included the impact on the machine tool forecast in the case of gas rationing and the upside scenario of a quicker than expected easing of inflation and interest rate rises. If there is a need for gas rationing this winter, this will mainly affect Europe, although it does lead to a downturn in GDP in the USA as well. The other risks to the forecast are around inflation – in one case, higher interest rates slow demand and world GDP is weaker in the medium term while in the other, it leads to a recession in advanced economies. As we heard in the earlier presentations, this is a key risk for 2023 and a close call on its likelihood.
After a brief look at the forecasts by region and for the major markets, Geoff summarised another forecast commissioned by CECIMO which looks at machine tool manufacturers orders in Europe (8 countries). This shows that orders probably peaked in Q1-2022 and are expected to fall back over the next 12 months before levelling off at the end of 2023; however, given the order backlog situation in many countries, the sales profile which is used in the Oxford Economics report will look rather different.
Turning to the UK, it was noted that our forecasts for the UK market for both machine tools and cutting tools have been downgraded compared to the Spring forecast. In addition to the risks in the global forecast, there are some UK specific issues which also need to be considered. In addition to the timing gap between the master macro and industry forecasts and our own analysis, there have been a number of economic changes, including another spike in gas prices and the ill-fated “mini-budget” and its subsequent economic fall-out. There have also been a series of revisions, some of them significant, to the UK economic data – these mainly affect output and, therefore, the cutting tool forecast.
The key impacts were summarised, with the revisions to the manufacturing output data now showing a broadly flat trend for 2020 as a whole (the pandemic dip is completely recovered in the 2nd half of the year) and sharp growth in 2021 creating a boom if the revised data is to be believed. Accompanied by some significant changes at the industry level, most notably perhaps for aerospace but also affecting the machinery and metal products industries, the overall impact on our cutting tool forecast is likely to be on the downside.
The revisions to the investment data were relatively small and the main risk to the machine tool forecast in the UK comes from the change in confidence as a result of recent economic events. When the forecast model was run, the latest data on investment intentions came from the CBI survey published in July which showed an optimistic outlook with uncertainty over demand at a very low level historically and capacity utilisation high – both of these gave a positive input to the forecast. The next report from this survey is due out early next week and is likely to show a significant weakening in sentiment which adds a downside risk to our forecast.
The other UK specific issue around the forecast is the impact of the super-deduction scheme and the parallel extension of the Annual Investment Allowance to £1 million. We have some evidence that these have stimulated investment intentions and, although it is a little early to see this in the data, there is at least a suggestion of a positive impact with spending on “ICT & other machinery” taking an increased share of business investment in the latest figures.
With these incentives due to end on 31st March 2023 (although the original mini-budget did make the extended AIA permanent), this has created a change to the usual quarterly profile for the UK machine tool market with Q1-23 being much stronger than usual as equipment is delivered to meet the deadline to claim the additional allowances. This has the effect of making the downturn in 2023 less than the underlying trends would suggest and, in turn, lowers the recovery in 2024.
The presentation concluded with an overview of the published data on production, exports and imports of machine tools to illustrate how some strange data (principally in the 2019 machine tool production figures) have distorted the picture in the data that we use in public forums. All of the UK market forecasts in the main report are compiled using MTA’s own survey data and, we believe, more accurately reflect the movement of the market.
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You can download the reports – the MTA UK Machine Tool & Cutting Tool Forecasts and the Global Machine Tool Forecast – from the MTA website at https://www.mta.org.uk/members-area/mta-forecast-documents; please note that this is in the members area so you will need your login and password to access these documents. We have also placed the presentations from the Forecast Seminar on this page; initially, only Geoff Noon’s has notes on the slides but we will be adding these to the other presentations and updating these as quickly as we can.