Dutch manufacturers are climbing out of the deepest recession of the post-war period. This will lead to more industrial production in 2010. However, growth will remain sluggish for some time as consumers and companies remain cautious.
Economy and industry emerge from recession
As a cyclical and highly export-oriented sector the manufacturing industry has suffered badly from the international recession. Industry sustained the largest increase in the number of bankruptcies and the greatest decline in the volume of production of all business sectors in 2009. A record number of industrial concerns went out of business in the first half of 2009. The global downturn has bottomed out however. Producers and consumers are less pessimistic and world trade is picking up again. A number of industrialised countries emerged from recession in the second quarter. After five quarters of contraction, the Dutch economy expanded again in the third quarter, albeit slightly.
Production expanding again due to build-up of stocks and export demand
The improvement in sentiment has halted the slide in industrial production. Although turnover and orders are still well below their levels of a year ago, they are rising again. Industrial
production revives slightly as stocks are built up again. In 2010, industry will benefit mainly from growing foreign demand. Dutch exports will pick up again in response to the return of international business confidence. The stock building and export revival will eventually have to be followed by increased consumer spending to solidify the improved prospects for industry in the longer term.
Investment and consumption lagging behind
The overcapacity that has been created is forcing manufacturers to do everything they can to reduce costs. Producers are more likely to continue reducing production capacity than expand it in 2010. Industrial investment will therefore decline further. Companies will also continue to downsize their workforces. The worsening labour market will have a negative impact on consumers’ finances. Consequently, although consumer confidence has improved significantly since the beginning of this year, no significant upsurge in private consumption is expected in the short term.
Improved margins in sight
The recent rise in commodity prices is indicative of a worldwide increase in industrial activity. More expensive raw materials could delay a recovery in Dutch industry because they will drive up prices for industrial companies and increase the pressure on margins. However, selling prices have again been rising faster than industrial consumption prices since May, which can yield some desperately needed improvement in margins. Rising price levels could in time dampen demand but there is no immediate risk of this since the prices are still well below the peak level of 2008.
Improvement in all branches in 2010
Whereas production will shrink in every branch of industry in 2009, the scenario for 2010 is a mixture of growth and contraction. The outlook for industry as a whole in 2010 is more positive than in 2009. Early cyclical and export-oriented branches will perform best. In branches that manufacture basic products and semi-manufactures, production has already recovered slightly in the course of this year. The sustained decline in business investment means that manufacturers of capital goods will have to wait a little longer for recovery. In the food industry the tougher competition between supermarkets is putting a strain on the relationship between retailers
and food manufacturers and is leading to lower selling prices for the industry. Because basic products account for a large share of its activities, the chemical industry is among the earliest cyclical and trade sensitive branches of industry. The sector therefore suffered relatively early and heavily from the fall-off in demand. However, the chemical sector is also leading the recovery due to renewed stock creation. After a steep downturn, the plastics industry is also on the verge of recovery. Up to now, production in the printing and allied industries has fallen by less than the average for industry as a whole. However, there is a risk that the slump in this sector will last longer. Although it will be less badly affected by the contraction of exports this year, the printing and allied industries will also benefit less from the recovery of global trade. The metal processing industry has fallen from high peaks to deep troughs, but demand for metal semi-manufactures will gradually improve. The machinery industry is generally showing a slight improvement but no strong recovery is anticipated for the time being because of persistent pressure on business investment. The cyclical character of the transport sector combined with the thrift being shown by consumers has caused the production of transport equipment to decline by twice as much as the average industrial production this year. The export recovery and premiums for scrapping old cars will generate some additional demand and improve prospects for 2010. The building materials industry will experience the steepest fall
in production. Because the building sector experiences the consequences of economic developments at a late stage, suppliers of building materials still face a severe drop in production in 2010.
Industrial production under long-term pressure
Industrial production will not immediately return to the heights of the autumn of 2007 in the coming years. Given the imbalances in the economy it is highly likely that the knockon effects of the crisis will continue to depress production growth for some time. The build-up of capital and reduction of debt will take priority over consumption and investment in the coming years. This trend will probably be apparent not only among households, companies and financial institutions, but also among public authorities. The effects of the crisis will also be reinforced by its international scale.