Alessandro Sciamarelli Director, Economic and Market Research, EUROFER
Despite the impact of Russia's war in Ukraine and rising energy and commodity prices, coupled with very high inflationary pressures, real GDP growth in the EU for 2022 reached +3.5 percent (previously estimated at +3.3%). EUROFER's GDP forecasts for the EU in 2023 were marginally revised downwards compared to the previous outlook (+0.6% vs. +0.7%; +0.8% according to the latest European Commission forecast released in September 2023). However, overall economic uncertainty still lingers for 2024, resulting in EUROFER’s GDP growth forecast of +1.1 percent (+1.4% according to the European Commission). Thanks to the higher-than-expected resilience of the economy and a positive, albeit declining, contribution from the services sector, the EU is set to avoid an economic recession also in 2023. Yet, the growth outlook remains critical, mainly due to the impact of inflation still at historically high levels and the monetary policy tightening (the ECB policy rate was raised to 4.5%, its highest level on record). Looking ahead to 2024, EU economic growth is expected to gain some ground, but downside risks remain. Among them, the continuing war in Ukraine, persistently high inflation and interest rates and, lastly, additional geopolitical tensions in the Middle East linked to the Israeli-Palestinian conflict, which are likely to weigh further on economic confidence and on energy prices. The impact of these downside factors is set to be asymmetrical across EU individual economies. Germany is projected to experience a moderate recession in 2023 (-0.5%), before a very modest recovery (+0.3%) in 2024. Sweden is also expected to face recession (-0.6%) in 2023 and a subsequent recovery in 2024 (+1%). For France and Italy, in 2023 the forecasts predict real GDP growth of +0.8 percent, and of +0.6 percent and +1.0 percent respectively for 2024. while Spain is expected to have a more sustained growth both in 2023 (+2.1%) and in 2024 (+1.7%).
The latest IMF World Economic Outlook (October 2023) forecasts global GDP growth of +3.5 percent in 2023 and +2.9 percent in 2024, with +0.7 percent and +1.2 percent in the euro area for 2023 and 2024, respectively. For Germany, the IMF projects -0.5 percent in 2023 and +0.9 percent in 2024. The OECD, in its latest outlook (September 2023), estimates euro area GDP growth to be +0.6 percent in 2023 and +1.1 percent in 2024, while predicting for Germany a slightly milder recession (-0.2%) in 2023 and growth (+0.9%) in 2024.
The effects of monetary tightening on the industry and the economy have not been fully realized yet, as they often have a lag. Expectations are that high interest rates will persist, as inflation is projected to remain above the two percent target (3.2 percent according to the European Commission in 2024), which will have a dampening effect on economic growth expectations.
Throughout 2023, domestic demand, particularly private consumption, was providing a very modest contribution to GDP growth, given persistently high inflation that reduces household disposable income. This was partially offset by the significant amount of savings that households were able to cumulate during the pandemic. Services are expected to continue to provide the primary contribution to GDP growth, while manufacturing is expected to remain weak, contrary to the post-pandemic rebound experienced in 2021 and up to the first quarter of 2022.
In the second quarter of 2023, the EU economy recorded flat development after marginal growth in the preceding quarter (+0.2%) following a drop of -0.1 percent in the fourth quarter of 2022. Germany experienced a technical recession (i.e., two consecutive quarter-on-quarter drops) between the fourth quarter of 2022 and the first quarter of 2023 (-0.4% and -0.1%, respectively), before recording zero growth in the second quarter. On year-on-year basis, the EU's real GDP continued to grow, albeit at a slower pace (+0.4% % in the second quarter of 2023, following +1.1% in the first quarter).
Among the biggest EU economies, in the second quarter of 2023 Germany paid the highest toll to high inflation and the monetary policy tightening affecting its manufacturing sector, especially the automotive industry. On the other hand, other major euro area economies performed better: both Spain and France achieved positive GDP growth (+0.5% each; +2.2% and +1% year on year). By contrast, Italy, whose manufacturing sector is deeply integrated with its German equivalent, saw a deterioration of the economic environment, as real GDP dropped (-0.4%) quarter on quarter, while growing (+0.4%) year on year. In line with the latest leading indicators, which continue to signal weakness in the manufacturing sector, it has appeared very unlikely that EU economies would see growth gaining speed over the last quarter of 2023 and in early 2024. Although GDP data for the fourth quarter of 2022 and the first quarter of 2023 marked the trough of the current cycle, the economic outlook remains very uncertain with fragile growth conditional upon several downside factors.
Energy prices have once again become a source of concern recently, after the sharp decrease seen from the second half of 2022 and the decline of the TTF Natural Gas Price Index from its peak of €342 per MW/h in August 2022 - which was 20 times the average value observed in 2021. The reasons behind these developments include a lower gas demand outlook due to the economic slowdown, a mild winter, the EU’s price cap, and the successful transition from Russian pipeline gas to shipborne liquefied natural gas (LNG) from other suppliers. However, natural gas prices have risen again in recent weeks to €52 MW/h. Additionally, the recent turmoil in the Middle East and ongoing geopolitical tensions are supportive of potential future increases in oil prices despite expectations of low global demand, which could impede economic growth.
Inflation, at first perceived as temporary, has become a primary concern and reached highs unseen since 1985 in the EU, peaking at 11.5 percent in the EU in October 2022. Data from August 2023 (5.9%) confirm that inflation had eased considerably since then. However, there were still significant differences across EU member states: in September 2023, in Spain the inflation rate regained speed (3.2%) after falling to a low of 1.6 percent in June, while it was above seven percent in Croatia and Slovenia. Among the biggest euro area economies, inflation was at 4.3 percent in Germany, 5.6 percent in France and 5.7 percent in Italy. Although energy prices decreased considerably (from 41% in June 2022 to -0.3% in May 2023), core inflation increased from 5.0 percent in October 2022 to 5.3 percent in August 2023. This points to the fact that inflationary developments seem to be driven more by endogenous factors than by external shocks. Prices are expected to cool off overall in 2023 and 2024 (6.5% and 3.2% according to the European Commission). EUROFER foresees an inflation rate of 5.9 percent in 2023, further decreasing to 2.5 percent in 2024. This means that, despite some moderation, inflation was still set to remain around historically high levels throughout 2023.
Due to the highest inflation rate over the last 35 years, central banks in advanced economies were bound to quickly reverse their hyper-expansionary monetary policy stance. The ECB raised its policy rate from zero up to 4.5 percent since July 2022, with the last hike in September 2023. No further hikes are expected, but real interest rates remain negative and inflation was expected to remain well above the 2.0 percent ECB inflation target throughout 2023. This will inevitably reduce the room for manoeuvre for supportive fiscal policies, in particular government spending by EU member states, as borrowing costs will be higher, especially for highly-indebted economies. Despite the ongoing downside factors, the deterioration of the economic outlook and the need of continued public support to the economy, the Stability and Growth Pact - suspended until the end of 2023 – is being enforced once again from January 1, 2024.
The severe consequences of the war in Ukraine and the deteriorating overall economic outlook continued to take their toll on apparent steel consumption in 2023. After a significant recession (-7.2%) in 2022, persistent downside factors such as ongoing conflicts, uncertainty surrounding energy prices and high inflation, combined with a worsened economic outlook, are again set to negatively impact apparent steel consumption in 2023, for which the forecast indicates a more pronounced contraction (-5.2%) compared to the previous outlook (-3%). This would mark the fourth annual recession in the last five years. In 2024, conditional on more favourable developments in the industrial outlook and increased steel demand, apparent steel consumption is projected to recover at a faster rate (+7.6%, up from the former estimate of +6.2%).
The overall evolution of steel demand remains subject to very high uncertainty. Quarter-on-quarter improvements in apparent steel consumption were not expected before the fourth quarter of 2023.
In the second quarter of 2023, real steel consumption decreased (-1.3%) again, after the contraction in the first quarter (-0.9%).
Real steel consumption had rebounded strongly in 2021 (+9.6%, after -9.8% in 2020), continued to grow in 2022 (+2.0%, revised upwards from +0.3%), while it is expected to slow down in 2023 (+0.3%), before gaining some speed again in 2024 (+1.0%).
The two consecutive recessions of 2019 and 2020 were caused by a considerable slowdown in the activity of steel-using sectors due to a downturn in manufacturing and trade, and the COVID crisis, respectively. The counter-cyclical destocking trend that started in late 2019 persisted throughout 2020. It only began to reverse in the first quarter of 2021, when growth in steel demand was expected to continue. The trend of weak demand conditions continued in the first two quarters of 2023, given the impact of the war in Ukraine, high inflation and uncertainty on the global industrial outlook and energy prices. Real steel consumption increased in 2022 (+2%) and is projected to continue to do so only marginally both in 2023 (+0.3%) and in 2024 (+0.2%). The expected improvement in the industrial outlook and steel demand aligns with Steel Weighted Industrial Production (SWIP) index developments.
In the second quarter of 2023, apparent steel consumption dropped for the fifth consecutive quarter (-7.6%), after shrinking in the preceding quarter (-11.3%). The total volume came to 35.6 million mt, showing an improvement compared to the first quarter of 2023, but still falling short of the levels seen in 2021 and the first half of 2022. The current downturn in EU apparent steel consumption began in the second quarter of 2022, due to war-related disruptions, unprecedented rises in energy prices, production costs and inflation, all amid growing economic uncertainty. Demand conditions significantly worsened in the latter half of 2022, and this negative cycle is expected to continue at least until the third quarter of 2023 included, driven by ongoing economic uncertainty resulting from high inflation.
Domestic deliveries continued to mirror weak demand in the second quarter of 2023, declining (-6.5%) for the fifth consecutive time, but at a slightly more pronounced pace than in the first quarter (-6.2%). In 2021, deliveries had rebounded significantly (+11.9%), after the sharp drop in 2020 (-9.6%) and the already negative performance in 2019 (-4.2%). As a result of the unfavourable developments in the last two quarters of the year, in 2022 domestic deliveries markedly dropped (-7.9%).
In line with the continued deterioration in steel demand, imports into the EU including semi-finished products similarly shrank in the second quarter of 2023 (-10.2%), albeit at a slower pace than in the preceding quarter (-26.6%). However, it is essential to note that the drops in imports were primarily a reflection of weak demand conditions. Therefore, the share of imports out of apparent consumption remained considerably high in historical terms, even in the second quarter of 2023 (28%).
Despite Russia’s invasion of Ukraine and above-average energy prices, the EU steel-using sector’s output continued to grow up to the second quarter of 2023, displaying unexpected resilience. The SWIP index increased further (+0.8%, following +2.6% in the first quarter of 2023).
The more-than-expected positive trend in all sectors’ outputs in the second quarter of 2023 was a combination of continuing favourable developments in the automotive, mechanical engineering and transport sectors on the one hand, and a decrease in domestic appliances, tubes and metalware outputs on the other. The construction sector, as anticipated, entered recession and recorded its third consecutive quarter-on-quarter decline (-2.5%, after +0.5%). The recessionary trend is expected to persist. The overall positive trend in the SWIP index which started after the pandemic continued in spite of soaring energy prices impacting production costs, component shortages and lower outputs that took their toll on total production activity in steel-using sectors in the second half of 2022.
The deterioration of the economic and industrial outlook in the EU - especially due to high inflation and the subsequent interest rate hike by the European Central Bank (ECB) - has had a limited impact on steel-using sectors’ outputs so far. The construction sector, which accounts for 35 percent of steel consumption in the EU, is the only significant exception.
The ongoing economic uncertainty is set to continue affecting growth over the upcoming quarters. Despite EU industry having weathered the toughest quarters on record (Q4 2022 and Q1 2023), the remainder of 2023 appeared to be characterized by a combination of uncertainties in energy prices, weak demand, and inflation and economic challenges driven by higher interest rates.