Europeoutlook2023ThethreatstoEurope’sindustrialcompetitivenessTheworldleaderinglobalbusinessintelligenceEIUoffersdeepinsightandanalysisoftheeconomicandpoliticaldevelopmentsintheincreasinglycomplexglobalenvironment;identifyingopportunities,trends,andrisksonaglobalandnationalscale.Formedin1946,withmorethan70yearsofexperience,itisideallypositionedtobeacommentator,interpreterandforecasteronthephenomenonofglobalisationasitgatherspace,enablingbusinesses,financialfirms,educationalinstitutionsandgovernmentstoplaneffectivelyforuncertainfutures.Actionableinsighttowinintheworld’smarketsTheworld’sleadingorganisationsrelyonoursubscriptionservicesfordata,analysisandforecaststhatkeeptheminformedaboutemergingissuesaroundtheworld.Wespecialisein:Countryanalysis—accessdetailedcountry-specificeconomicandpoliticalforecasts,aswellasassessmentsofthebusinessenvironmentsindifferentmarketswithEIUViewpoint.Riskanalysis—ourriskservicesidentifyactualandpotentialthreatsaroundtheworldtohelpourclientsunderstandtheimplicationsfortheirorganisations.Availableproducts:FinancialRiskandOperationalRisk.Industryanalysis—five-yearforecasts,analysisofkeythemesandnewsanalysisforsixkeyindustriesin60majoreconomies.Theseforecastsarebasedonthelatestdataandin-depthanalysisofindustrytrends,availableviaEIUViewpoint.SpeakerBureau—booktheexpertsbehindtheaward-winningeconomicandpoliticalforecasts.Ourteamisavailableforpresentationsandpanelmoderationaswellasboardroombriefingscoveringtheirspecialisms.ExploreSpeakerBureauformorespeakerinformation.ContactusLONDONNEWYORKHONGKONGEconomistIntelligenceEconomistIntelligenceEconomistIntelligenceTheAdelphi750ThirdAve,5thFloor,1301CityplazaFour12TaikooWanRoadTaikoo1-11JohnAdamStreet,London,WC2N6HTNewYorkNY10017,UnitedStatesShing,HongKongUnitedKingdomTel:+12125410500Tel:+85225853888Tel:+44(0)2075768000e-mail:americas@e-mail:asia@e-mail:london@GURGAONDUBAIEconomistIntelligenceEconomistIntelligenceSkootrSpaces,UnitNo.112thFloor,TowerB,POBoxNo-450056,OfficeNo-1301AAuroraBuildingNo.9DLFCyberCity,Phase-IIIGurgaon-TowerDubaiMediaCityDubai,122002Haryana,UnitedArabEmiratesIndiaTel:+97144463147Tel:+911246409486e-mail:mea@e-mail:asia@Formoreinformationonoursolutionsandhowtheycanhelpyourorganisation,pleasevisit.EUROPEOUTLOOK2023THETHREATSTOEUROPE’SINDUSTRIALCOMPETITIVENESSThethreatstoEurope’sindustrialcompetitivenessEnergymarketdynamicsforEuropein2023willbeaschallengingasin2022.NaturalgasstorageinEuropeislikelytobecompletelydepletedbythespring,whilelittlenewimportcapacitywillyetbeavailable.HighenergycostsandfallingdemandareforcingindustryacrossEuropetoidle.Inputcostswillremainelevatedforseveralyears,makingsomeEuropeanindustrialsectorsuncompetitive,andresultinginalossofglobalmarketshare.?

Chemicalsandbasemetalswillbetheworstaffectedowingtotheirhighrelianceonnaturalgasasaninput,butdownstreamindustriessuchastheautomotivesectorwillalsosuffer.Chinaissettobenefitatthegloballevel.Withintheregion,weexpectashifttowardsproductioninsouthernEuropefromcentralEurope,withservicesholdingupbetterthangoodsproduction.ThestarkincreaseinenergycostsfortheEuropeanindustrialsectorin2023andbeyondwillhaveasignificantimpactonthecompetitivenessofEuropeanindustry.Inaddition,thecomingrecessionwillreducedomesticdemandforindustrialproducts;withglobalfreightcostsnowdecliningaspandemic-relatedsupply-chaindisruptioneases,importsubstitutionisbecomingmoreattractive.Europeanindustryalreadyhadahighercostbasethanotheradvancedeconomies.AfurtherincreasewillmakeproducinginEuropeanunprofitablebusinessstrategyformanyenergy-intensivefirms.IncreasesinEuropeaninputcostsoutpaceotheradvancedeconomies(producerpriceindex;2021=100)CanadaFranceGermanyItalyJapanUKUS180160140120100806020121314151617181920212223242526Source:EIU.*EIUforecastsfrom2023.1 ?TheEconomistIntelligenceUnitLimited2022EUROPEOUTLOOK2023THETHREATSTOEUROPE’SINDUSTRIALCOMPETITIVENESSGivenincreasinggeopoliticaluncertaintyandthesizeandexpenseofmovingcapital-intensiveprocessestoAsia,wedonotexpectatrendofrelocation.Instead,weexpectfirmstoshutdownsomeEuropeanproduction(possiblypermanently)andreplaceitovertimebyincreasingproductionelsewhere.However,thesedynamicswillbefeltdifferentlyacrossindustries.Inthisarticle,weexaminefourkeysectorsinwhichtheimpactwillbeparticularlyacute.Energy:thetransitionacceleratesThepushtowardsrenewableswillsupportEuropeanfirmsinvolvedintheenergytransition,withstreamlinedregulatoryarrangementsandgreatersubsidies.However,Chinawillremainthegloballeaderinoverallproduction,with76%ofallphotovoltaiccellsproducedthere(comparedwithlessthan14%inGermany).Evenonnewinstallations,2020datashowtheEUfallingfurtherbehindChina,anddrawinglevelwiththeUS.Windenergyfacessimilardynamics.Despitethegascrunch,hydrocarbonproductioninEuropewillnotsignificantlyincrease,withtheexceptionofNorthSeadrillinginNorwayandtheUK.IncreasednuclearpowerisplannedinFrance,SwedenandtheUK,aswellasincentralEurope,butallthoseinitiativeswilltakeseveralyearstocomeonline.Onthecorporatelevel,majorenergyfirms—includingUniper,EDFandothers—arefacingsignificantstrainastheyscrambletoreplaceRussiansupplies,limitingtheirpotentialtobemajorinvestorsinglobalprojects.Theconstructionofnewgasinfrastructureisdesignedtobedual-usewithhydrogentofuture-prooftheinfrastructureinvestment.Thiswillresultingovernmentslookingincreasinglyfavourablyonhydrogenprojects,whichcanmakeuseoftheinfrastructure.However,thewidespreadtake-upofhydrogenisstillseveralyearsawayandlikelytobeconcentratedinsectorsmakingthehigherupfrontinitialinvestment.Metals:eye-wateringcostsExtremelyhighenergyusageinthesmeltingprocess,aswellasfallingpricesformetalssuchasaluminiumandzinc,iserodingprofitabilityinthemetalssector.Averagemonthlywholesaleelectricitypricesinkeycountriesreachedabout€375/MWhinSeptember,atenfoldannualincrease.Foraluminium,themostenergy-intensivemetaltosmelt(at14MWh/tonneofprimaryproduction),thisimpliesapowerinputcostingUS$5,200/tonne,morethandoublethespotpriceofaluminium(lessthanUS$2,300/tonne).Othermetalssuchassteel,althoughlessenergyintensive,areseeingsimilarlyunviablecostdynamics.Operatingsmeltersundersuchconditionsisnotsustainable,evenforshortperiodsoftime,andoverhalfofproductivecapacityinEuropeisnowidle.Evenplantswithlong-termpowercontractswillbeatriskasthesecomeupforrenewal.Thelongerwholesalepricesremainabove€100/MWh—theywereatabout€200/MWhinearlyNovember—themorechallengingitwillbetorenewataffordablerates.Evenfirmswithaccesstopowerunderpreferentialtariffshavehadtocutproduction.Somesmeltershavemaintainedsomeproductionbyavoidingpeakusagetimes;butmanycellscanonlyremainwithoutpowerforafewhourswithoutriskingacostlymetalfreeze.Giventheseextremeoperatingconditions,theriskoffurthersmelterclosuresremainshigh.2 ?TheEconomistIntelligenceUnitLimited2022EUROPEOUTLOOK2023THETHREATSTOEUROPE’SINDUSTRIALCOMPETITIVENESSChemicals:nosubstituteforgasThechemicalssectorissecondonlytometalsintermsofenergyintensity,withnaturalgasbeingafeedstockformanychemicalsaswellasasourceofheatgeneration,makingsubstitutionparticularlydifficult.Productionofammonia(ofwhichnaturalgasisafeedstock)isparticularlyuncompetitiveatpresent,andabout70%ofEurope’sfertiliserproductioncapacityhasbeenhalted.Mostwillnotberestarted,raisingrisksforcropyieldsintheshorttermandalossofmarketshareinthelongerterm.BASF,Germany’slargestchemicalfirm,usesasmuchenergyannuallyastheenergyusageofDenmark.WiththeEuropeancostbasealreadyhigherthaninotherdevelopedmarketsevenbeforethecrisis,andsettoremainatthiselevatedlevelthroughoutourforecastperiod(2023-27),thisisnolongeraprofitablebusinessmodel,andthecompanyplanstopermanentlydownsizeitsoperationsintheregion.Europeisthereforesettoloseglobalmarketshareforthechemicalindustry,withChina(alreadythelargestplayer)poisedtobenefit.3 ?TheEconomistIntelligenceUnitLimited2022EUROPEOUTLOOK2023THETHREATSTOEUROPE’SINDUSTRIALCOMPETITIVENESSEuropeanenergyconsumptionformetalsandchemicalsishuge(2019)Energyconsumption(%ofindustry)Grossvalueadded(%ofmanufacturing)MetalsChemicalsMetalsChemicals05101520253002468101214GermanyGermanyFranceFranceItalyItalySpainSpainSources:InternationalEnergyAgency;UNIDO;EIU.ThewiderrecessionwillreducedemandinEurope,furthererodingthechemicalssector.Demandforindustrialfibres,polymersandplasticsusedinconstructionandcarmanufacturingisfalling,andinputsfor(nowidled)industrialprocesses,suchascausticsoda,vitalforaluminiumsmelting,arenolongerindemand.Automotive:lessaffected,butalreadyinaslumpAlthoughlessdirectlyenergyintensivethanothersectors,theautomotiveindustryrepresentsabout7%ofEUeconomicoutputandsupportsvastupstreamanddownstreamsupply-chainnetworksthroughoutEurope.Inadditiontofirms’directenergyuse,whichnowcostsmore,inputpriceshaverisenforenergy-intensivemetals,glass,semi-manufacturedinputgoods(especiallyelectricalwiringfromUkraineandmineralgoodsfromRussia)andcriticalinputsforelectricvehicles.AweakglobalautomotiveoutlookishurtingEuropeanexportsGlobalmotorvehiclesandpartsmarketdemand(%change,yearonyear)*12840-4-8-1220181920212223242526Sources:Eurostat;EIU.

Machineryandtransportequipmenttradebalance(EU27;€bn)*2520151050-5201819202122*EIUforecastsfrom2023.AutomotivefacilitiesinEuropewerealreadygrapplingwithover-capacityevenbeforethepandemic;therecessionwillfurtherreducedemandbothwithinandoutsideEurope.Weexpectthatthiswillleadautomakerstocutbackinvestmentandproductionintheregionasitbecomesunprofitableamidhigherenergyandlabourcosts.However,weakerpriceinflationinsouthern4 ?TheEconomistIntelligenceUnitLimited2022EUROPEOUTLOOK2023THETHREATSTOEUROPE’SINDUSTRIALCOMPETITIVENESSEuropepresentsanopportunityforautomakerstonearshoresomeenergy-intensiveproductionprocessessouthwardstoMediterraneancountries,whereliquefiednaturalgas(LNG)terminalsarealreadyfunctionalandkeepingenergycostscontained.Conclusion:whattowatchoutforTheincreaseinEuropeanindustry’salreadyhighcostbasewillbeanetlossforthecontinent.Withintheindustrialsector,theimpactwillbemostkeenlyfeltinchemicalsandfertilisers,sectorsinwhichnaturalgasisadirectinputtothefinalproduct,whereassectorssuchasautomotive,whichusegasforenergy,butwithpossiblealternativepowersources,willseesignificantsubstitutionand,asaconsequence,lesslastingscarring.Thegascrunchalsocreatesopportunitiesforfirmsthatcanprovideeffectivesubstitutesforgasinindustrialprocesses,whichmayalsodriveinnovationintheenergyandmaterialsspaces.Pressureonheavyindustriesislikelytoseethelessenergy-intensiveservicesectorholdupbetterthroughtherecessionandbemorelikelytodrivefuturegrowth.Businessconfidenceforindustryhasfallenfurtherthanforservices(seasonallyadjusted;%balanceofresponses)France Germany Italy SpainIndustry3020100-10-20J FMAM J J A SOND J FMAM J J A SO2021 2022Sources:EuropeanCommission;EIU.

Services3020100-10-20J FMAM J J A SOND J FMAM J J A SO2021 2022Globally,Chinaiswellpositionedtobenefit,withpre-existingcostbaseandscaleadvantagesinmetals,chemicals,andsolarandwindinstallations.Regionally,southernEuropewillseeitscompetitivenesswithinEuropeincrease,asithasmoreinstalledLNGandpipelinecapacity,attheexpenseofcentralandeasternEurope.SouthernEuropealsobenefitsfrommilderwinterclimatesandgreaterrelianceonservicestobeginwith.Firmsactiveinthegreentransitionstandtobenefit,assubsidiesandnewformsofenergygenerationwillraiseprofitabilityinthemediumtolongterm.OneissuetowatchoutforistheintroductionoftheEUCarbonBorderadjustmentmechanismin2026.ThismaypresentacompetitiveadvantageforchemicalsproducersinEurope,whichalreadyscorewellongreenmetrics,andwillbeanimportantconsiderationforEuropeanfirmscurrentlyexpandingproductioninnon-EUmarketsbutplanningonimportingtotheEU.5 ?TheEconomistIntelligenceUnitLimited2022EIUViewpoint:CountryAnalysisPreparingyouforwhat’saheadUnderstandacountry’spolitical,policyandeconomicoutlookwithouraward-winningforecasts,analysisanddata.Ourexpertsassesstheglobaldynamicsthatimpactorganisations,soyoucanplanandoperateeffectively.What’sincluded?Globalandregionaloutlookspanningpolitics,economicsandmarket-movingtopicsDailyinsightsonthedevelopmentsthatimpactthefutureoutlookExecutivesummariesofcountryforecastsoverthemedium-termoutlookMedium-termcountryforecastson~200countries’politicalandeconomiclandscapeLong-termcountryforecastsonthestructuraltrendsshaping~80majoreconomiesIndustryanalysisontheoutlookfor26sectorsin~70marketsCommodityforecastsonsupply,demandandpricesof25criticalgoodsMacroeconomicdataonforecasts,aswellashistorictrendsIndustrydataondemandandsupplyofkeygoods,nowandinthefutureProprietaryrating