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EU industrial structure 2011 — Trends and Performance FIgURE I.12: EU-27 manufacturing growth rates of production and new orders (T/T-12) for manufacturing goods from January 2001 to June 2011 20 15 10 5 0 -5 -10 -15 -20 -25 -30 -35 The main aggregates of manufactured goods show similar developments Declines in new orders were particularly dramatic for capital goods, intermediate goods and, to a lesser extent, consumer durable goods. The second step in the analyses is carried out with indicators from EU business surveys. 22 Three indicators, assessment of order‑book levels, of stocks of finished products, and expectations of future demand, confirm the picture of recovery and its fragility that has taken place during recent 28 months. Order‑book levels and production expectation reached their lowest levels in the middle of 2009. These two indicators provide information on developments in production in the near future. Stocks of finished products act as a buffer and allow production to continue at a higher than actual demand during recessions. Stocks of finished products started to increase in mid‑2007 and reached its highest level in April 2009. The stocks kept declining until April 2011 but began to rise in May 2011. The rise since May mirrors the declines of the other two indicators, cf. Figure I.13. FIgURE I.13: EU-27 manufacturing order-books levels, stocks of finished products and production expectations from January 1985 to February 2011 (monthly data) 30 20 10 0 -10 -20 -30 -40 -50 -60 -70 Jan-85 Manufacturing production Manufacturing new orders 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: own calculations using Eurostat data. Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Production expectations for the months ahead Assessment of stocks of nished products Assessment of order-book levels Note: There is a break in the time series due to a change in the classification of economic activities. Data until April 2010 are collected according to NACE Rev. 1.1. Data from May 2010 according to NACE Rev. 2. 23 Source: Directorate General for Economic and Financial Affairs. 22 Directorate General for Economic and Financial Affairs business surveys. 23 The change of classification to NACE Rev. 2 entails a change in the identification and grouping of similar economic activities in the business surveys. This gave rise to a break in the time series. Analyses of consequences of the change indicate that the changeover has affected the level but did not, on the whole, affect the direction of the change, only its magnitude. See DG ECFIN, http://ec.europa.eu/economy_finance/ db_indicators/surveys/nace2/index_en.htm for further discussion. 23 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
The third step in assessing future developments involves an attempt to predict future developments of EU manufacturing production. The development of EU manufacturing production displays significant changes over time, with some marked breaks in the series. One way to characterise such a series is to think of it in terms of being in different regimes or states. Two such states can be expansion and contraction. Provided that the economy is in expansion, there is a probability that it will be in contraction the next period. 24 The assessment of future developments is performed by an econometric analysis of the probability of contraction of EU manufacturing production between 1990 and June 2011. 25 The three large recessions during the time period were associated with large probabilities of contraction. In the latest recession, FIgURE I.14: Increasing probabilities of contraction in the end of 2011 115 110 105 100 95 90 85 80 75 Chapter I — The aftermath of the crisis — a long and uneven recovery(?) probabilities fell significantly during the end of 2009. The probabilities of contraction remain low as manufacturing picks up again after the trough. The assessment also includes a forecast of manufacturing production between July 2011 and June 2012, with the associated probabilities for a contraction during this period of time. The vertical blue line at the right of the figure divides the sample into actual and predicted production. The forecast is based on the latest available data for manufacturing production and manufacturing new orders. 26 According to the forecast, manufacturing production growth slows down in the end of 2011 but picks up slowly again in the beginning of 2012. The probabilities of contraction during the forecast period are rising but still below 0.2, cf. Figure I.14. 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: own calculations using Eurostat data. Manufacturing production Probability of contraction Forecast There is a high degree of uncertainty associated with the analysis above. The forecast of EU27 industrial production and predicted probabilities should therefore not be taken literally. It is very difficult to assess how the developments in the financial markets that occur at the drafting of this report will impact on industrial production. Also other forecasts 24 If the economy is expanding in the current time period, the probability that the economy will be expanding also in the next time period is p. The probability that the economy instead will be contracting in the next period is then 1-p. 25 See Hamilton, J. D. (1989) for a discussion of the method. and business cycle indicators indicate that economic activity will slow down in the EU. DG ECFIN’s Economic Sentiment Indicator declined in July 2011 both for the EU and the Euro area. Also, the Flash Consumer Confidence Indicator declined in July. 27 26 A bivariate VAR model including three lags of growth rates of manufacturing production and new orders is used for the forecast. New orders is deflated by manufacturing producer prices. 27 http://ec.europa.eu/economy_finance/db_indicators/surveys/ index_en.htm 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 29
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communi‑ cation computer and info
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