Moldmaking Opportunities in Europe

Use this data and analysis to help develop a strategic vision for what foreign markets you should explore to grow your sales beyond the U.S.

The European Union (EU) is the second largest economy in the world, generating a gross domestic product (GDP) in 2013 of $15.8 trillion or approximately 23 percent of the world’s GDP. It had been the world’s largest economy, but the United States regained that position, producing $16.7 trillion in economic output last year. This was the first year since the financial crisis that the EU was not in first place. Together, the EU and the U.S. generate 37 percent of the world’s economic output of $87.18 trillion.

The EU is a politico-economic union of 28 states that are primarily located in Europe and includes Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, 
Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, the Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom. It has established a single market across the territory of all its members. In addition, 18 of its member states have also joined a monetary union known as the Eurozone or Euro area, which uses the Euro as a single currency. According to Credit Suisse Global Wealth Report 2012, the EU owns the largest net wealth in the world, estimated to equal 30 percent of the $223 trillion global wealth. Of the top 500 largest corporations measured by revenue, 161 have headquarters in the EU.

On June 17, 2013, the beginning of negotiations between the EU and the U.S. on the Transatlantic Trade and Investment Partnership (TTIP) agreement was announced. TTIP seeks to remove trade barriers in a wide range of economic sectors to make it easier to buy and sell goods and services between the EU and the U.S. In addition to reducing tariffs across all sectors, the EU and the U.S. want to tackle barriers behind the customs border, such as differences in technical regulations, standards and approval procedures. These barriers often unnecessarily cost time and money for companies that want to sell products in both markets.

During the May election for the European Parliament (EP), Europeans voted overwhelmingly for the moderately conservative European People’s Party (EPP) and the moderately left-of-center Socialists and Democrats (S&D). Voters also preferred new Eurosceptic national parties over the traditional liberal (free market), green, far left, and conservative and reformist candidates. Now as many as 30 percent of the members of the EP can be labeled as Eurosceptic, although in all likelihood only 20 to 25 percent of them might promote consistently anti-integration policies.

This EP election result could likely impact TTIP negatively, as traditional pro-American political forces might be more hesitant to support the treaty. Given the EP’s continuing increased scrutiny of commission-initiated proposals, the timetable for the treaty’s conclusion is likely to shift much further into the future.

Macroeconomic Overview
Although the advanced European economies are expected to resume growth this year, economic growth in Europe is stumbling again, despite the fact that the manufacturing sector is showing signs of strength. Advanced economies, according to the International Monetary Fund (IMF), include Austria, Belgium, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Norway, Portugal, San Marino, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland and the United Kingdom.

Domestic demand in the Euro area has finally stabilized and moved into positive territory, with net exports also helping to end the recession. High unemployment and debt, low investment, persistent output gaps, tight credit and financial fragmentation in the Euro area still serve as drags on the recovery, however. Downside risks arise from incomplete reforms, external factors and even lower inflation. Since early 2011, Eurozone quarterly GDP growth has not once surpassed 0.3 percent. It grew just 0.8 percent over the last four quarters. Fiscal austerity clearly weighs on overall spending, and private demand continues to suffer from consumer malaise. 

Although the Euro area has finally emerged from recession, the overall European recovery is uneven across countries and sectors. The Euro area includes Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, the Slovak Republic, Slovenia and Spain. Pockets of stronger growth are mingled in with stagnant or declining output elsewhere. Growth remains largely export-led, although there has been a small resurgence in domestic demand in France, Spain and Germany. Private investment, however, has still not rebounded across the Euro area. Longer-term concerns about productivity and competitiveness linger, despite important reforms in several countries.

The weakness is exacerbated by deepening regional disparities in economic performance. Italy, Finland and the Netherlands languish in effective recessions, while Poland, Germany and the UK move forward amid improving fiscal balances and rising consumer confidence. This will invariably create tensions, especially within the Eurozone, where common rules on monetary policy and fiscal guidance must support policymaking.

Domestic demand is anemic with consumers still keeping purse strings tight, even in countries with expanding income such as Poland, the UK and Sweden. Uncertainty over policy, including at the EU level, looms large over this situation. Over-all GDP rose 0.3 percent in the entire EU in the first quarter and 0.2 percent in the Eurozone—both lower than expectations.

At the same time, manufacturing production rose in each of the past five months and is running just over 3 percent ahead of a year ago in the EU and just under 3 percent in the Eurozone. Only parts of Scandinavia’s industrial sector remain in recession. The core central European four (the Czech Republic, Hungary, Poland and the Slovak Republic) plus Romania are growing annually at rates of around 8 percent or better.

The Manufacturing Alliance for Productivity and Innovation (MAPI) forecasts manufacturing production to advance this year by 2 percent in the Eurozone and 5.5 percent in the CEE3 (the Czech Republic, Hungary and Poland), and by 2.6 percent and 5.4 percent, respectively, in 2015. This year, GDP is slated to advance 1.1 percent in the Eurozone and 2.4 percent in the CEE3, and 1.4 percent and 2.9 percent, respectively, in 2015.

In looking forward to 2015, only a marginal improvement in Europe’s manufacturing production is forecast. The CEE3 and Sweden will experience manufacturing growth rates of 4.5 percent or more, while Germany and Austria should expand at a rate of about 3 percent each. Downside risks include a possible disruption of gas deliveries resulting from political tensions between Russia and Ukraine, as well as an unanticipated panic around Europe’s financial system.

Growth decelerated in emerging and developing Europe in the second half of 2013 as the region contended with large capital outflows. According to the IMF, emerging and developing European countries includes Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Hungary, Kosovo, Lithuania, Former Yugoslav Republic of Macedonia, Montenegro, Poland, Romania, Serbia and Turkey. Despite positive spillovers from advanced Europe, here the recovery as a whole has weakened in 2014. Fragilities in the Euro area, some domestic policy tightening, rising financial market volatility and increased geopolitical uncertainty stemming from developments in Ukraine have weighed heavily on the region, putting these risks at the forefront.

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Countries are sequenced according to the World Economic Forum 2014 ranking. Orange represents ranking deterioration, green signifies ranking improvement and no color represents no change. Chart courtesy of World Economic Forum and World Bank and Heritage Foundation.

Ease of Doing Business
The recent economic downturn lasted longer and in some sense was more painful than its American equivalent. Along with the recession itself, some countries underwent a crunch on their sovereign debts, rocking the political foundations of the EU at the same time. Unemployment remains high and capital formation lags amid more fragmented financial markets. In the aftermath of this upheaval, some confidence in the competitiveness of the European marketplace may have eroded.

In an attempt to analyze whether the ease of doing business in Europe has slipped over the past five years, Dr. Krzysztof BIedowski, a senior economist at MAPI, examined three broad-based rankings (see Chart 1, page 37) that assess the business climate in 29 European economies. As Dr. Bledowski says, “Each approach places emphasis on a differing set of angles that define the ease of doing business.”

Three Rankings
The World Economic Forum’s (WEF) Global Competitiveness Index filters institutions, policies and factors that determine a country’s productivity level. This measure focuses on 12 pillars: institutions, infrastructure, macroeconomics, health and primary education, higher education, goods, labor and financial markets, technology, market size, business sophistication, and innovation. The sample spans 148 countries.

The Index of Economic Freedom by the Heritage Foundation analyzes a country’s commitment to rule of law, size of government, regulatory efficiency and market openness. This index captures economic freedom through 10 dimensions: property rights, corruption, fiscal policy, government spending, business, labor policy, monetary policy, trade, investment and finance. The sample spans 186 countries.

Finally, the World Bank’s Doing Business index tracks regulations applied to companies operating in the largest business city of each economy. The 10 dimensions covered here include starting a business, construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. The sample spans 189 countries.

Results Comparison: 2009 and 2014
The 2009 ranking (based on 2008 surveys and data) reflects pre-crisis conditions, while 2014 captures the current circumstances. Between 2009 and 2014, rankings improved in only about a third of the 29 economies. This would support the contention that European business has slipped in competitiveness. The pro-business climate has deteriorated more in some countries than in others, but the worsening trend is consistent across the three rankings.

In terms of absolute change in rankings, the top seven economies exhibited the least movement. This means they lost or gained little competitive advantage through the downturn, showing resilience and stability. Only two economies (Germany and Poland) improved across all three rankings. These countries came through the recession in good shape.

Seven economies dropped in all three rankings: France, Iceland, Ireland, Spain, Hungary, the Slovak Republic and Greece. Meanwhile, Italy, Austria, Denmark and the Netherlands lost ground in two rankings and had unchanged scores in the third. A number of these countries underwent severe crises (Iceland, Ireland, Spain and Greece), others experienced deep recessions (Netherlands, Hungary, Spain and Greece), while still others engaged in tense reform debates with little to show for them (Italy and France).

Pronounced Slippage of Europe’s Rankings
What emerges is a picture of relative decline in competitiveness and ease of doing business. This is largely in line with popular perceptions held by business leaders and almost certainly reflects sizable structural dislocations that took place in many regions. Europe continues to be buffeted by lingering risks, including the unfinished institutional setup of the EU, ongoing banking tribulations and rising political opposition toward tighter integration. 

U.S. Plastics Industry Exports
From 2000 to 2013, U.S. plastics industry exports to the EU grew by more than 70 percent from $4.6 billion to more than $7.9 billion, and from 2012 to 2013, they increased by 3.7 percent. Although in 2013, the U.S. plastics industry exported goods valued at more than $7.9 billion to the EU, plastics imports from the EU also rose 8.6 percent to $8.2 billion, yielding a negative trade balance or deficit overall of $238.3 million.

Table 1 shows the top 10 export markets of the EU for the U.S. plastics industry, based on total dollar value. Those countries highlighted in gray increased both from 2000 to 2013 and from 2012 to 2013.

U.S. plastics industry exports to the EU in 2013 by core segments were:
Resins:    $4.4 billion (5.3 percent increase)
Products:    $3.1 billion (1.4 percent increase)
Machinery:    $308 million (6.0 percent increase)
Molds:    $54 million (7.7 percent increase)

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Export Opportunities for Moldmakers
Table 2 shows the top 10 export markets of the EU for U.S. molds for plastics, based on total dollar value. Those countries highlighted in gray increased both from 2000 to 2013 and from 2012 to 2013. The figures from two of the countries in this table are particularly notable: first, the large percentage increase in exports to Belgium from 2012 to 2013, as it is a trans-shipment country for all of Europe, and second, the significant percentage increase in exports to Germany in that year, because of its overall economic health.

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The key question related to opportunities in Europe is: Will the economic growth, demand and manufacturing production continue in key EU countries, and perhaps spread to other member states? To provide a partial answer to this question, five of the EU economies are highlighted here, based on their macroeconomic environments, potential for growth and export strength with regards to the plastics and mold industries.

The Czech Republic
In 2015, the Czech economy will expand 2.5 percent, as cyclical expansion in Germany is pulling demand for intermediate products made in the Czech Republic. Output of manufactured goods such as wood, refined petroleum, rubber and plastics, and fabricated products is particularly strong.

Germany
In 2015, overall economic growth will reach only 2 percent in Germany. This is respectable by European standards, but well short of past performance. On the positive side of the ledger, a higher minimum wage, rising immigration and a steady flow of women into the labor force are strengthening the possibility for growth beyond 2015. Manufacturing production has rebounded and is running better than 4 percent annually. Private consumption is fueled by rising income and wealth, along with a housing surge. The manufacturing boom is broadly based, with durable goods such as electronics and optics performing particularly well. Output of intermediate goods has risen 5 percent since the beginning of 2013.

Spain
As structural reforms imposed by the IMF take hold, Spanish growth is picking up speed. Increased productivity has enabled moderate pay raises, and exports are also on an upward trajectory. The country had three consecutive quarters of growth up to the first quarter of 2014. Amid returning business confidence and falling interest rates, the labor market has stabilized and demand for labor is increasing. Spain will remain near the lower end of the manufacturing growth rankings over the next 1.5 years, however. Its recovery is broad-based but subdued. Pockets of particular strength include electronics and selected types of specialized machinery.

Austria
The Austrian recovery is moving at a moderate but steady pace. GDP gained about a percentage point in total over the past three quarters, and the economy should grow about 1.5 percent this year and expand at a faster pace in 2015. The recovery has been export-led thus far. The industrial side of the economy is only just now getting off the ground, with production of chemicals, pharmaceuticals and motor vehicles trending upward. Expect total output to increase to just less than 3 percent this year and a little more than that in 2015.

Poland
Poland’s expansion is gathering pace, although growth in consumer spending slowed somewhat last year. Poland is significantly exposed to the turmoil in Ukraine, and with trade and investment links to Russia and Ukraine so large, business sentiment could suffer should tensions escalate and sanctions be imposed. Manufacturing is seeing strong growth, however. At a predicted annual growth rate of about 6 percent this year and next, the country will rank near the top of the EU. 

On balance, there are solid reasons to be cautiously optimistic about sustained economic growth in Europe. If the TTIP negotiations are successful, this could spur and spread positive momentum across the EU. It is not a foregone conclusion this will happen though, nor is it a given that Europe will avoid any of the potential downside risks already discussed. The largest single threat to continued economic growth and stability in the EU and the U.S. is most likely political uncertainty.

References:
Office of the U.S. Trade Representative

Manufacturing Alliance for Productivity and Innovation (MAPI)
International Monetary Fund (IMF)
U.S. International Trade Commission

SPI: The Plastics Industry Trade Association

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Use this data and analysis to help develop a strategic vision for what foreign markets you should explore to grow your sales beyond the U.S.