EU manufacturing output down by 1.6pc in 2023

The EU's manufacturing production fell in 2023, reversing two consecutive years of growth when the bloc's economy was recovering from a downturn during the Covid-19 pandemic.

The bloc's manufacturing production last year was down by 1.6pc compared with 2022, according to preliminary data from statistics unit Eurostat. It had increased by 3.7pc in 2022 and by 9.9pc in 2021.

The EU's emergence from a series of lockdowns had boosted economic output in 2021 and followed consistent growth every year between 2014 and 2018. Manufacturing output tended to move in tandem with industrial gas demand, particularly in the first decade of the 2000s, although this relationship slowly decoupled later into the 2010s when Europe's heavy industry began to slow (see year-on-year changes graph).

Increasing globalisation probably also contributed to this — manufacturing performed outside of the bloc's territory can still be classified as EU production as long as the participating EU company provides the contractor with the technical specifications and owns the input materials in the production process, Eurostat told Argus.

The relationship between manufacturing production and industrial gas demand completely uncoupled in 2022 with the onset of the conflict in Ukraine. Manufacturing production rose by 3.7pc on the year to reach an all-time high, but industrial gas demand fell by 15.3pc. This was the largest difference between these two indicators in this century, with the only other comparable year being 2006, when EU manufacturing output climbed by 5.1pc but industrial gas demand dropped by 7.3pc on the year.

This contrast reflected the historically high cost of gas, which caused a drop in output from many gas-intensive industries and prompted firms to substitute gas with other fuels where possible. High gas prices also encouraged some companies to prioritise production outside of the EU, or to import gas-intensive materials such as ammonia from outside the EU, which could then be transformed into finished products in Europe. Industrial gas use for non-energy purposes — mostly as a feedstock — fell to by far its lowest this century (see industrial gas use graph).

While Eurostat does not yet have a breakdown for industrial gas demand in 2023, manufacturing output contracted by 1.6pc, while total EU gas demand dropped 7.8pc on the year. Despite the decline, EU manufacturing output as a whole still recorded its second-strongest year, at 110.9 points against a 2015 basis of 100. But gas-intensive sectors again struggled last year.

Output from chemicals — the most gas-intensive sector of all — dropped by 8.1pc on the year to the lowest against a 2015 basis since 2009. Basic metals output fell by 5pc to its second-lowest level since 2009. Other gas-intensive sectors, such as non-metallic minerals, recorded significant declines (see sector indexes graph).

Output did grow in the motor vehicles and basic pharmaceuticals sectors, which indirectly require gas given their input requirements such as steel, glass and chemicals. Motor vehicles output reached by far its highest since 2019, as chip shortages eased and demand for cars began to bounce back.

Signs of recovery?

Manufacturing output bounced back in the fourth quarter of last year from its low point in the third quarter, but still remained below the first six months of 2023.

EU manufacturing output rebounded to 111 in the fourth quarter, from 108.7 in the previous three months, against a 2015 baseline of 100. But it was still lower than in January-June 2023.

And the majority of gas-intensive sectors reduced their output in the fourth quarter from the third quarter, with most falling by about 2pc, although chemicals output only edged lower. One notable exception was the paper and paper products industry, in which output grew on the quarter for the first time since the second quarter of 2022.

Overall producer sentiment remains gloomy given the anaemic economic growth in the EU. The bloc barely avoided recession, posting 0.1pc growth in the fourth quarter after contracting by 0.1pc in the third quarter. Bankruptcies across the bloc also increased, by 0.6pc on the quarter, while annual inflation rose to 3.4pc in December from 3.1pc in November, the first month-on-month increase since October 2022. Sticky inflation means the EU's high interest rates are unlikely to come down soon, acting as a major barrier to EU trade and investment.

Eurostat's economic sentiment indicator has held at 96 points against a long-term average of 100, indicating a broadly pessimistic outlook from producers. But 96 is above the low point of 93.6 in August last year, pointing to a modest uptick in business conditions.

By Brendan A'Hearn

EU y-o-y percentage changes in industrial gas demand and manufacturing

Industrial gas consumption for energy and non-energy use TJ

EU manufacturing output, basis 2015=100

Manufacturing output by sector, basis 2015=100