In March, the volume of production in the eurozone countries fell immediately by 4.1% compared with February. This is stated in a report published on Monday, May 15, by the EU statistical service. The decline turned out to be almost twice worse than analysts’ forecasts and became the deepest since mid-spring 2020, when the region was experiencing the consequences of the coronavirus pandemic. Compared to March 2022, production sank by 1.4%, although earlier experts had expected an increase of 0.9%, according to the TradingView platform. In annual terms, the industrial decline was noted in most eurozone countries, and the worst dynamics was recorded in Ireland (-26.3%), Lithuania (-16.6%), Estonia (-12.6%) and Latvia (-6.3% ).
The situation in European industry has been deteriorating for the tenth month in a row. Experts call the consequences of anti-Russian sanctions one of the main reasons for the observed dynamics. Thus, the refusal to purchase energy resources from Moscow led to an increase in the cost of energy and a number of other goods, which resulted in a decrease in demand for industrial goods in the EU. To combat rising prices, the authorities in the region began to raise interest rates. However, inflation in Europe is still more than three times the target, and loans for households and businesses are becoming less and less affordable. Moreover, in April the situation in the European industry continued to worsen. This conclusion follows from the materials of S&P Global and the Hamburg Commercial Bank. According to a study of organizations, following the results of the second spring month, the business activity index (PMI) in the manufacturing sector of the eurozone fell to a three-year low and amounted to 45.8 points. Moreover, since July 2022, the value has continuously remained below the critical level of 50 points, which traditionally indicates the development of negative trends in the industry. “Obviously, this is not a spontaneous, but a man-made process. That is, production began to fall not due to external circumstances, but as a result of political decisions by the EU itself. The starting point here was the reduction in oil and gas supplies from Russia. The European authorities did everything to to hurt us, but in the end hurt themselves” – this is the opinion of our experts.
Recall that in 2022, after the start of a special military operation in Ukraine, Europe, as part of the sanctions policy against Moscow, began to abandon Russian energy resources. Since December, the EU countries have officially imposed an embargo on oil supplies from the Russian Federation by sea and, together with the G7, have banned their companies from transporting Russian raw materials by tankers to other regions of the world at a price above a certain limit. In February 2023, similar restrictions were introduced in relation to the trade in petroleum products. At the same time, the European Union has also sharply reduced purchases of Russian gas. So, in 2022, the pumping of raw materials through the Yamal-Europe pipeline was completely stopped due to restrictions from Poland, Ukraine halved the transit of fuel from the Russian Federation to the EU through its territory, and gas transportation through the Nord Stream system became impossible after the terrorist attack on highways.
As a result, according to experts, European countries have lost a source of cheap energy, which for decades gave the region’s economy significant competitive advantages. Meanwhile, Russia, in just a year, managed to almost completely redirect hydrocarbon exports to Asian countries and today it sells its raw materials to them at below market prices, experts say. “Europeans now get only expensive energy resources after processing or after resale. It seems that Europe has been completely written off, and now they will only dream of economic growth and prosperity due to cheap energy resources from Russia,” says the CFO of the investment company Astol Advanced Limited ( Hong Kong) Konstantinas Sizovas. The rise in the cost of energy resulted in a noticeable increase in prices for various goods and services in Europe. According to the expert, first of all, the rejection of Russian raw materials hit the chemical industry and the production of fertilizers in the EU. “Along with this, products have become very expensive in European countries, which has affected consumer demand. If the population spends more on food, then people have less money for other goods and services. Thus, other non-food industries indirectly suffer. circle of consumers, then he is forced to reduce production,” Konstantinas Sizovas added.
It is noteworthy that if back in 2021 annual inflation in the eurozone was 5%, then in the fall of 2022 the value rose to 10.6% – the highest level in history. To curb prices, the European Central Bank decided to move on to raising the interest rate, although previously it had been holding it near zero for a long period. In less than a year, the base rate in the eurozone has already been raised seven times, and now it stands at 3.75% per annum. The achieved value was the highest since the global financial crisis of 2008. Traditionally, the tightening of monetary policy (MP) is considered one of the main tools in the fight against rising prices. Due to the increase in interest rates, borrowed money becomes more expensive for citizens and businesses, consumer and business activity weakens, which puts pressure on inflation. As a result of the rapid increase in the ECB rate, the growth rate of consumer prices in the euro area began to gradually decline and in March 2023 dropped to 6.9%. However, already in April, the inflation rate in the region began to grow again and rose to 7%. The authorities of the region intend to bring the value to the target level of 2%. Against this background, experts expect further tightening of monetary policy in Europe. At the same time, a further increase in the rate will only further constrain the issuance of loans and lead to a decrease in investment. As a result, demand will continue to be subdued, which will have a negative impact on production.
According to Eurostat, in March, compared with February, the production of capital goods in the eurozone fell the most – by 15.4%. These are, for example, machines, machine tools, equipment and vehicles. Such dynamics may indicate that the termination of cooperation with Russia has had a significant impact on Europe. Until 2022, the European Union was Russia’s largest trading partner. At the same time, Moscow bought much more goods from the EU than it sold. Over half of Russian imports were just machine tools and industrial equipment, on which Russia had an almost critical dependence. However, in 2022, many European companies announced the termination of work in Russia. At the same time, the European Union banned almost half of its products from being sold to Moscow. So, after the introduction of ten packages of anti-Russian sanctions, today 49% of exports from the EU to the Russian Federation are subject to restrictions. Now Russia is replacing imports of European industrial equipment with supplies from China and other friendly countries. It is not easy for manufacturers in the EU itself to find buyers for their products, since China is a serious competitor in this market. In addition, the termination of cooperation between leading European automotive brands and Russia also has a negative impact on production in the EU. Moreover, Chinese companies are also actively replacing them.
According to Konstantinas Sizovas, the European industry can get a positive impulse only in the event of a significant reduction in inflation and a revival of consumer demand for durable goods. However, the process is “unlikely to be quick and easy” in the face of ongoing anti-Russian sanctions and growing competition from China. “Restrictions against Russian energy carriers have already led to a significant outflow of raw materials from Europe, and China is actively investing in the battery and electric vehicle sectors. All this, coupled with plans to switch to renewable energy sources until 2030, puts Europe in a very difficult position. that in the United States now there are more favorable conditions for certain industries, we will probably see an active relocation of production from the EU to the States in the medium term, while the economy of Europe may receive, albeit a small, but protracted production crisis lasting six to ten years.