European business confidence hits rock bottom
Business confidence in Europe has hit rock bottom in the second half of 2022, with a third of the region’s biggest industrial companies expecting to stop or scale back operations in the bloc because of record energy prices and slowing demand.
US business leaders are equally gloomy about Europe’s prospects, expecting a deep recession in the EU over the next 12-18 months, versus a shortlived and shallow downturn at home, according to a survey by the European Round Table for Industry lobby group for major businesses, and the Conference Board, the US think-tank.
The findings add to mounting evidence that the war in Ukraine is taking a heavy toll on EU industry. Earlier this month S&P Global’s purchasing manager indices showed the sharpest decline in private sector activity since November 2020. Industrial sectors from chemicals to fertilisers to ceramics have been forced to suspend production because of soaring energy costs, while others are stepping up imports.
Martin Brudermüller, chair of ERT’s competitiveness committee and chair of German chemicals group BASF, said he was not surprised by the responses. “I have already seen for myself the impact of the energy crisis on Europe’s energy-intensive industries and the ripple effect throughout the value chain. We are still at real risk of a wave of deindustrialisation, as ongoing high energy costs undermine the global competitiveness of European production sites.”
The twice-yearly survey of European business leaders found that the measure of confidence in Europe had plunged from 37 in the first half of 2022 to 24 in October, the lowest since the start of the pandemic. US business leaders’ confidence fell to lows not seen since the 2007-2009 recessions, from 42 to 32. A score above 50 reflects more positive than negative responses.
“The outlook for the eurozone is clouded amid soaring energy prices that are dampening manufacturing, and the surge in inflation that is biting into real incomes and consumption,” said Riccardo Marcelli Fabiani, economist at Oxford Economics in a recent briefing note.
Industry is also warning of the risk that a flagship $369bn green technology initiative in the US, known as the Inflation Reduction Act, could divert even more investment away from Europe.
Some 50 members of the ERT met with France’s president Emmanuel Macron and European single market commissioner Thierry Breton this week to demand a “compelling European response to the IRA”. Without it, there could be a “further wave of deindustrialisation, as the US attracts the latest waves of investments in new operations and R&D”.
This would have “potentially disastrous implications” for the small and medium sized businesses that dominate industrial ecosystems across the EU, the ERT said.
Like their larger counterparts, small businesses are feeling the pain of high energy prices, inflation and volatile supply chains. A recent survey of 42,000 companies in 25 countries by Eurochambres, which represents more than 20mn businesses across the EU, found that confidence for next year was “even lower than during the 2008-09 financial crisis and the height of the pandemic”. All indicators showed that companies expected the situation to “get worse”, it said.
That view was supported by the ERT/Conference Board survey in which nine out of 10 respondents expected the economic outlook to worsen over the next six months.
Nevertheless, the study found that more than 90 per cent of respondents intended to maintain or increase investment in green energy.
Chinese business leaders, meanwhile, stood out as outliers in the survey with the overall measure of their business confidence improving in the second half of 2022, although it still remained negative overall.
In a sign that China is succeeding in its ambition to move up the value chain, roughly a third of European business leaders said China was an important driver of research and development and innovation for their businesses.