Machinery production: A correction or contraction?

With the global economy slowing down, machine production is likely to follow suit.

09/12/2011


Following a generally strong recovery in 2010, the economic outlook at the start of this year appeared to be a reasonably positive one. There were caveats, certainly; Greece’s debt crises and the potential of economic fragility in Ireland and Portugal affecting the Europe to mention two. But these were, on the whole, considered to be diminishing threats to a solid economic recovery. However, the past few months have seen seemingly an endless stream of news items pertaining to further economic woes: first quarter GDP figures were revised down in the UK, the US, Germany and France; many countries GDP forecasts were revised down for the year; the US lost its triple-A credit rating (at least in the eyes of one major ratings agency) and came close to defaulting; Greece requiring a second bailout; the decimation of share prices around the world. The list goes on. 

So, economic output is slowing, that much is evident. But what does it mean for machinery production? Traditionally, machinery production is more-or-less in phase with GDP, so a slowdown in the economy doesn’t really bode well. There are also figures on machinery that point to things slowing down; indices released by the US, Germany and Japan all point to the rate of growth slowing in recent months. 

However, before pressing the panic button, there are a couple things to bear in mind. The first is that following the incredible growth seen in 2010, there was always going to be a point where the rate of growth slowed down. It was simply never going to be the case that production continued to grow at the rate seen throughout last year; things had to cool down at some point. The second consideration is that machinery output this year is generally still far above where it was last year. In 2011, machinery production will increase beyond the levels seen in 2010 – according to our latest forecast output will grow by 10.2% in 2011. 

If the slowdown means that global machinery production growth falls from 17.2% in 2010 to 10.2% in 2011, then there is an argument that such a slowdown is nothing to worry about. Perhaps a slowdown in growth was inevitable; however, a continuation in the trend would certainly point to a problem down the road. The question that hangs over the economy in general is the same as the one that hangs over the machinery sector: is this slowdown a correction after a steep recovery last year, or is it the start of a more protracted contraction? At the moment we feel the likelihood lies with this being an inevitable settling-down following the terrific growth of last year, but not the start of another down period. Of course, only time will really tell. 

This sentiment is reflected in our machinery production forecasts (graphic below) which are updated on a quarterly basis. 

Graph explaining machinery production growth by region from 2006-2015. Courtesy: IMS Research



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