NL Update - Dutch manufacturing industry cools down further

The industry continues to struggle, partly due to the high interest rates of recent years. Construction activity has been lower, suppressing demand for building materials, and fewer cars and capital goods such as machinery are purchased. The industry is struggling with overcapacity, which is putting pressure on profit margins and investment.

Malaise in Germany

European industry in particular is struggling. The Netherlands’ most important trading partner, Germany, is facing the biggest problems. Germany has a large car industry, which is struggling with lower sales and cutthroat competition from China in the field of electric cars.

Germany also has large energy-intensive industries, such as the chemical industry and the steel industry. Natural gas prices are lower than during the 2022 energy crisis that was a result of the Russian invasion of Ukraine, but are still, for example, three times as high as five years ago. Europe is making more use of LNG, which leads to higher natural gas prices. This affects the competitive position of European companies that consume large quantities of natural gas. Electricity prices are also higher than before, partly due to the higher gas price, which makes the use of gas-fired power stations for the generation of electricity more expensive. This is especially necessary on dark days when there is little wind, which reduces the generation of solar and wind energy.

High energy costs are not the only cause of the malaise in German industry. As mentioned above, the car industry is also struggling with low demand and Chinese competition. The steel market is also in crisis. Lower car production and the bursting of the real estate bubble in China have caused demand for steel to collapse, pushing prices down. In October, Volkswagen already reported a reorganization in which tens of thousands of jobs in Germany may disappear. In November, the Bosch group, which supplies a lot to the car industry, and the large steel manufacturer Thyssenkrupp also announced that they would cut thousands of jobs.

Tension around Trump

Donald Trump's victory in the United States (US) presidential election is creating uncertainty for business, especially for industrial companies that export a lot to the US. During his election campaign, Trump announced import duties of 10 to 20 percent on European products. It is very uncertain whether Trump will go through with these plans. In 2018, he also threatened with hefty import duties on European products, including German cars, but after negotiations with the European Commission, these were largely off the table. Whether European exports are really hampered will likely depend on negotiations. The uncertainty could put pressure on investments in the coming months.

Recovery is needed

Demand recovery is desperately needed, also for Dutch industry. The Nevi Purchasing Managers' Index shows that backlogs of work are shrinking, at the fastest pace in more than a year.

It seems that the substantial investments in Artificial Intelligence (AI) can save the coming year somewhat. Thanks to rapid growth in investments in data centers, among other things, the demand for advanced chips is increasing. The demand for smartphones, for example, is also picking up. Chip machine manufacturer ASML could benefit from this next year, and with ASML also many Dutch suppliers.

The outlook is uncertain. The high energy prices, fierce competition from China and a possible trade war are suppressing the sentiment. Further interest rate cuts could also stimulate demand for industrial products in the coming year. Falling short-term interest rates can make it cheaper to finance inventories. A fall in long-term interest rates can lead to increasing demand for building materials, cars and machinery, for example.