MarketLine Blog

Is there a recipe to boost manufacturing sector growth in the Eurozone?

In 2010, the US Federal Reserve (Fed) launched its Quantitative Easing (QE) program with the aim of re-establishing credit conditions by accelerating inter-bank lending and, consequently, supporting business and consumers to have access to relatively cheap loans. The policy was designed to support the overall level of economic activity in the United States, raise inflation and employment to levels consistent with the Fed’s maximum employment and price stability mandate.

The announcement that it would artificially create money by increasing its liabilities was seen as an unorthodox monetary policy by mainstream economists, and, consequently, heavily criticized. However, analysis conducted by the Federal Reserve shows that the program had some positive impact on economic growth and inflation. The first wave of QE significantly changed the path of the American economy adding 2.8% to real GDP in 2010.

It is most likely that the policy effects trickled down to the manufacturing sector via more favorable lending rates to business and consumers. As shown by MarketLine research , the new cars market in the United States, after collapsing approximately 40% in value in 2009, registered a compound annual growth rate (CAGR) of 13.8% between 2010 and 2013. The machinery market, which includes agricultural machinery, mining equipment and construction equipment, expanded with an astonishing CAGR of 12.9% between 2010 and 2013, reaching a value of US52bn in 2012.

Additionally, and more importantly, a combination of declining production costs such as falling natural gas prices, real wages, and real depreciation of the US dollar acted as a main driver of the short term recovery of manufacturing in the US.

According to the International Monetary Fund, favorable domestic prices of gas in the United States relative to the price of gas in the G-7 countries would positively impact US manufacturing. If the natural gas price gap between the US and the G-7 economies doubles, manufacturing production in the United States would expand by 1.5%. A number of manufacturing sectors would directly benefit from low energy costs. The analysis also
reveals that a 10% decrease in the cost of energy implies a 10% increase in the gross operating surplus of the primary metals sector, a 6% increase in printing and related Activities, a 5% increase in paper products, and a 4% increase in Chemical Products.

The European central bank (ECB) is on the edge of officially embarking on a large scale quantitative easing policy to fight against a structural unemployment rate of 10.3%, declining GDP and low inflation rates. Will QE be enough to drag the Eurozone’s manufacturing sector out of a pitiful performance or will other factors also have to play a significant role?


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