Following the sharp slump in investment in machinery and equipment this year, the EU Commission expects double-digit growth rates for many EU countries in 2021.
As a result of the global coronavirus pandemic, economic output worldwide is declining at an unprecedented rate this year. Even if the economic slump is not as severe as initially feared, the decline will nevertheless be greater than during the global economic crisis in 2009. At the beginning of September, the British Oxford Economics Institute predicted a global economic slump of 4.3 percent in the base scenario. For the EU-27, the downturn is likely to be more drastic at 7.5 percent. Industrial capacities are underutilized. On average in the EU, they were only 74 percent utilized in July 2020, although this is more than in April, when the average utilization rate was only 67.8 percent.
If industrial capacities are underutilized, there is consequently a reduced need to invest. Unless there is an imperative need for replacement, investments or the period of underutilization is used for rationalization investments. The latter, however, takes a certain amount of time until it becomes apparent in the form of orders from capital goods manufacturers.
It is clear the corona pandemic has led to great uncertainty among investors with regard to future prospects, which is reflected in a strong reluctance to invest in machinery and equipment. For 2020, the EU Commission predicts a slump in investment in machinery and equipment of around 20 percent in the EU-27 member states, adjusted for prices. By definition this equipment is not only machinery, but also information and communication technology (ICT) and business investment in vehicles. At minus 23 percent, Spain is likely to record the largest decline among the large EU economies. A strong recovery in investment activity in the European domestic market is forecast for 2021, with growth of 14 percent.
Since the low point in April, the sentiment surveys of the EU countries have shown a partly rapid improvement in sentiment among industrial companies, which has recently lost some of its speed. However, much of this improvement in sentiment is based on future production expectations, while the current assessment of order books is only recovering hesitantly. Nevertheless, the current increases in incoming orders and production are an important step for companies out of the pandemic valley.
The global Purchasing Managers' Index for the manufacturing sector recovered to 51.8 index points in August, up from 50.6 in July. The best results were recorded for the sub-indices Future Production, Production and New Orders with values between 60.8 and 52.8 index points. Survey results below the growth threshold of 50 were reported for export orders (49.9) and employment (48.6).
In the first six months of the year, production in the EU mechanical engineering sector shrank by an average of 16 percent after adjustment for prices. For 2020 in total, Oxford Economics published a baseline forecast of minus 12 percent. Growth of 10 percent is expected for the coming year. A key prerequisite for double-digit growth is that investors become more confident about their future business activities in the coming months. However, uncertainty about the further course of the corona disease pandemic remains high, especially in view of the winter months. In addition to Covid-19, however, trade conflicts, protectionism, the US presidential election in November and various political tensions are also downside risks in the current economic environment. As soon as the upturn seems sustainable, we should see stronger demand for investment and spending on machinery and equipment.