From German stagnation to the difficulties of the Chinese economy, an analysis of the prospects of European industry between geopolitics and the need for a new industrial vision

The current global economic situation poses crucial questions for European and Italian manufacturing, closely intertwined with increasingly complex international trends. Andrea Beretta Zanoni, economist, lecturer in Company Strategy and Policy at the University of Verona and in Strategic Analysis at Milano Bicocca University, takes us through an in-depth analysis of these scenarios, commenting on the evidence emerging from the balance sheet analysis of Italian foundries conducted by Assofond.

Prof. Beretta Zanoni, the analysis carried out by the Assofond Study Centre of 2023 data highlights a slight drop in revenues but margins still positive. In light of the current situation, can we consider this result as a natural adjustment or an early sign of deeper difficulties?
Looking at the data from a static perspective, 2023 was a positive year all round. Despite a slight dip in revenues (-1.7% on 2022), the return on investment (ROI) remained high, reaching 6.4%: a value higher than the three-year period 2019-2021 and nonetheless close to the sector’s best years. However, I believe it is necessary to look at the data with a more dynamic approach: 2023 in fact showed a trend that was anything but uniform, with signs of strong decline already visible in the last quarter, which we now know were confirmed in 2024. This trend was influenced by a general slowdown in European manufacturing, especially the one strongly integrated with German supply chains, which suffered a significant slump. This condition is not limited to the foundry segment, but affects the continent’s entire production fabric, and shows a structural vulnerability which is being talked about a lot in Europe today, also thanks to what the recent report on EU competitiveness conducted by Mario Draghi has underlined.

Is the decrease in foundries’ overall debt a positive sign or does it mask other issues?
At first glance, the decrease in debt may seem like a positive element, indicating greater financial stability. However, a more in-depth analysis suggests a different interpretation. In fact, this decrease does not seem to be so much linked to a strategic streamlining of financial resources but rather to an increase in caution in the face of a worsening economic situation and, in some cases, to difficulty accessing credit. The reduction in debt, in a context of generally low levels however, seems to derive from businesses’ greater aversion to risk, probably caused by a feeling of uncertainty and fear about the future. This behaviour reflects a conservative choice which, on the one hand protects businesses in the short term, could, on the other hand, reduce their capacity for investment and innovation, essential elements for competitiveness in the long run. It is fundamental to monitor these signs since, within a context of low debt rates, a further reduction could indicate a fallback in entrepreneurial drive, with negative implications for the sector’s growth.

Added value and EBITDA have grown compared to the values of previous years. How can you explain this trend?
2023 benefitted from a favourable factor: the drop in average prices of raw materials. This phenomenon allowed businesses to optimise their margins by adjusting production costs faster than sales prices: a trend typical of carry-over effects. That is how added value improved, arriving at levels close to those before the pandemic. At the same time, EBITDA reached 10.9% of revenues, a value that exceeds that of 2022 and is the highest in the past six years. However, it must be underlined that this positive effect caused by the reduction in the cost of raw materials is unlikely to be confirmed: from what we have seen so far, in 2024 prices have not suffered any particular shifts and are thus likely to have stabilised at these levels.

Looking at 2024, how much does Germany’s troubles count and the geopolitical uncertainties regarding Italian manufacturing and its foundries?
Germany’s difficulties count considerably for Italian manufacturing, especially for the foundry sector, given the strong integration of our production chains. Germany has always been a driving force for the European economy and its slowing down – with forecast growth close to 0% for 2024 – is a systemic risk. Without considering that the government crisis, which is now self-evident and with early elections already set for next 23 February, could reasonably cast doubt on the prospects of the recovery which econometric models assume is possible for 2025. This scenario not only reduces direct demand for our products, but also amplifies uncertainties in supply chains, undermining the overall stability of European industry. On the international front, geopolitical instability, the US elections and the promise of new protectionist policies – like the introduction of customs duties – further increase the unknowns. For a country like Italy, which boasts a significant trade surplus with the United States, duties would be a serious blow to exports, with direct repercussions on the manufacturing sector. In addition, the impact of these policies could trigger inflation both in Europe as well as in the USA, with potential knock-on effects on monetary policies and on credit access. In fact, duties are inflationary by their very nature. If Trump keeps his promises, it is likely that the euro will weaken against the dollar, something which on the one hand could in some way reduce the negative effect of duties on exports, but on the other would certainly lead to inflation and could prompt the ECB to change the path of tax cuts started in recent months. But there is more: a policy of this kind would create inflation also in the United States, with consequences also on the decisions of the FED. This already complex scenario requires coordinated strategies on a European level to mitigate the risks and support competitiveness for businesses.

What are the priorities for the European and Italian industrial sector in the coming years?
It is fundamental to invert the trend of under investment that has been characterising our economic fabric for several years now. Investment levels in European manufacturing are lower not only than those in the United States, but also in Asian economies such as China and Japan. This lack of investments has had a direct and decidedly negative impact on the productivity and capacity for innovation of our businesses. To recover competitiveness it is necessary to develop an ambitious industrial policy that is not restricted to tax incentives or temporary measures, but that creates an ecosystem to promote long term investments. This includes an efficient financial system, a production fabric made up of businesses big enough to sustain a certain type of investment, more efficient access to credit, and stronger technological know-how. Only through an integrated approach will it be possible to guarantee the competitiveness and sustainability of the European industrial fabric. Furthermore, Europe must overcome internal divisions and adopt a single vision to tackle global challenges, from climate change to international competition. We need investments on a par with those being made in the United States: that is the challenge. The geopolitical situation is changing and this necessarily calls for a series of rethinks, including one concerning European public debt, since without a common debt, these investments are really difficult to make.

Will Europe be able to stay competitive on an international level?
Sure. In Europe, something has to change. In fact, after the three-year post-Covid recovery, we are clearly at a turning point for traditional growth models. In addition to the geopolitical uncertainties that have been dragging on for some time now, there is the economic stagnation in Germany, which we mentioned, as well as confirmation of the fragility of China and its economy, which is very dependent on exports and the victim of a growing deflationary trend. In this scenario, the difficulties of the Chinese domestic market and the possible new protectionist policies by the USA emerge as real threats to Europe. Moreover, we find ourselves in an era in which the paradox of competition between different economic and social models is very much in evidence: Western economies have to deal with the challenges of political consensus that lead, for example, the United States to punish the outgoing administration under which the American economy marched to excellent levels. On the other hand, we have a competitor like China which, despite its poor economic performance, does not see its ruling class facing the problem of consensus. This asymmetrical competition is and will remain a weakness for Western countries, at least in the short term. In the long term however, liberal democratic systems have far more significant resources to work with. As long as they don’t renege on themselves.