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Affected by their own restrictions: what is the deterioration of the situation in the European industry

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The situation in European industry has continued to deteriorate for nine consecutive months. That’s the conclusion of a study released Friday, March 24, by S&P Global.

According to the preliminary assessment of the agency, in March 2023 the business activity index (PMI) in the manufacturing sector in the euro area fell from 48.5 to 47.1 points. And since July 2022 the value has continuously remained below the critical mark of 50 points, which traditionally indicates the development of negative trends in the industry.

“There is a further decline in the number of new orders in the industrial sector, which means that the current volume of production is supported only by previously placed orders… The overall rate of inflation in production costs and sales prices remains high by historical standards. In fact, costs have risen again – at a rate not seen before the pandemic,” the report said.

Meanwhile, the weakest weakening in activity was in manufacturing in Germany, Europe’s largest economy. During the first month of spring the manufacturing PMI of Germany dropped from 46.3 to 44.4 points. The last time such a low level could be observed was in summer 2020, when the country was faced with the consequences of the coronavirus pandemic.

The observed dynamics indicate that CEOs are very skeptical about the future prospects of the situation. Vladimir Olenchenko, Senior Researcher at the Center for European Studies at IMEMO RAS, shared this opinion in a commentary for .

“Businesses have less and less confidence in the leadership of the countries where they are registered. That is, the regulatory mechanism does not inspire companies with optimism, so the increase in output in such conditions is regarded by enterprises as a risk,” the specialist explained.

The expert considers that high inflation creates additional difficulties for business. According to him, if before people actively invested their savings in securities of various companies, including industrial, against the background of rising prices and the rise in the cost of living, the volume of these investments has decreased significantly.

At the same time, to curb inflation in Europe now rates are rising. As a result, borrowing money for businesses is becoming less and less accessible, Olenchenko added.

Inflation in the euro area began to grow steadily back in 2021, against the background of the pandemic crisis. Then quarantine restrictions led to disruptions in the supply of components, components, raw materials and supplies, which eventually led to higher production costs. At the same time, the European Central Bank (ECB) began to actively print money to support the region’s economy, which was not sufficiently supplied with goods.

In 2022, the situation was exacerbated by Brussels’ sanctions against Moscow. In particular, the rejection of Russian energy resources led to a shortage of energy resources in European countries and, as a consequence, a frenzy of hydrocarbon prices in the first half of the year.

The rise in the cost of energy led to an even more serious increase in the cost of goods and services. Against this background, at one point inflation in the eurozone rose to nearly 11%, the highest in history.

Under these circumstances, the ECB decided for the first time in a long time to return to tightening monetary policy. Although the regulator had previously kept its interest rate around zero for a long period, it began to increase it sharply in 2022.

Last year the European Central Bank raised the prime rate six times and brought it to 3.5% per annum. The achieved value was the highest since the global financial crisis of 2008.

Note that traditionally the tightening of monetary policy is considered one of the main tools in the fight against rising prices. By raising interest rates, borrowed money becomes more expensive for citizens and businesses, consumer and business activity weakens, which puts pressure on inflation.

According to Eurostat, inflation in the Eurozone slowed down to 8.5% by March 2023 against the background of ECB actions. Nevertheless, the indicator is still several times higher than the regulator’s target of 2%.

“The fact is that the main causes of the acceleration of inflation have not yet been eliminated. For example, the rise in energy prices is primarily due to the rejection of daily gas from Russia and the transition to expensive LNG from the US and other suppliers. At the same time, food prices remain high due to the failure of a number of crops, the lack of cultivated areas and the rise in the cost of mineral fertilizers,” Natalia Milchakova, a leading analyst at Freedom Finance Global, told .

Under these conditions, it is assumed that the ECB will continue to raise the interest rate. Thus, the business activity of European business may weaken even more, the expert does not exclude.

“Loans will become more expensive first of all for small and medium-sized businesses. It will be more difficult to develop promising start-ups, including technological, and all this will reduce the competitiveness of European countries in the international market of high-tech products and services. It will be more and more difficult for larger corporations to borrow cheaply in the bond market, because of which their cost of debt service will grow,” the interviewee added.

One of the challenges for many European companies has also been the decision to leave Russia, experts say. Recall that in 2022, Western brands began to announce massively that they would cease operations in Russia after the start of a special military operation in Ukraine.

In parallel, the European Union banned the sale of almost half of its products to Moscow. Thus, after the introduction of ten packages of anti-Russian sanctions, 49% of exports from the EU to Russia are now subject to restrictions.

According to Vladimir Olenchenko, it may take three to five years for the enterprises to replace the Russian sales market, so for the time being, the European countries bear serious losses from their actions. A similar point of view was expressed earlier in an interview with by Russian Finance Minister Anton Siluanov.

“These states have suffered from their own restrictions on the supply of products to Russia. A number of foreign companies that used to work with us and bring their goods into Russia are now forced to cut production and lay off employees. Hence the simple thesis: when imposing restrictions, it is impossible not to feel them on ourselves, too,” Siluanov stressed.

Economists note that today certain fears of the EU leadership are caused by the transfer of European production in other jurisdictions, especially in the U.S.. Although the transfer of business to the U.S. is not widespread yet, the trend is gradually gaining momentum, said Vladimir Olenchenko.

“Much depends on industries. For example, the German company BASF (was a world leader in the chemical industry) for many years used cheap natural gas from Russia as a raw material. After sabotage of the Nord Streams, the organization first had to reduce production and then think about relocating it to other countries where it would have access to relatively inexpensive energy,” said the specialist.

Moreover, in 2022, the U.S. approved the “Inflation Reduction Act”. The document assumes the allocation of about $400 billion to finance the energy transition in the country over the next ten years. In particular, Washington plans to provide substantial subsidies to manufacturers of electric cars, batteries and energy equipment, provided that they are manufactured in the United States.

The U.S. initiative provoked a sharp reaction from the EU authorities. For example, the President of France, Emmanuel Macron said about the possible deindustrialization of Europe as a result of the U.S. actions. In turn, the head of the European Commission, Ursula von der Leyen, warned of the threat of a new trade war with Washington.

“The EU will respond to this law in an adequate and carefully balanced manner… This law could lead to unfair competition, the closure of markets and the disruption of critical supply chains,” von der Leyen told TASS.

According to Natalya Milchakova, given the current circumstances European corporations will continue to gradually transfer production to other regions of the world. The European Union may face both slowdown of economic growth and loss of the status of one of the largest international financial centers. Vladimir Olenchenko shares a similar position.

“European goods have already become more expensive and are losing their competitive advantages on world markets. It is obvious that American and British manufacturers benefit from this. This state of affairs only weakens the EU and deprives it of credibility,” concluded the expert.

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