The European coatings industry’s hope of a reasonably long period of healthy growth in demand seems to have been dashed with forecasts of a continued slowdown this year (2019)  and, even among some economists, a post-2019 recession.

The main sectors affected by the downturn are construction, automobiles and as a result of faltering capital investment, machinery.

The one bright spot is that after a time of increasing costs, raw material prices should decline offering opportunities for improved margins.

2017 looks now to have been a year when across much of Europe economic growth peaked following a gradual recovery from the 2008 financial crisis.  Then the first signs of a slowdown became evident in 2018 and in 2019 will be followed by a much broader, pan-European decline. 

The major Western European economies in Germany, France, Italy and the UK are weakening.
 
This year the UK could be hammered by Brexit with the effects of the country’s departure from the European Union, due in March, also impacting its main EU trading partners in northern Europe.  In fact, in 2018 the UK’s economy was already showing signs of a Brexit-triggered slowdown which affected coatings demand.

In 2018 in the 28 EU member states, including the UK, average GDP growth from 2.4 percent in 2017 to 2.1 percent, according to figures from the European Commission, the Brussels-based EU executive.

With the EU 27 states, minus the UK, it dropped from 2.6 percent to 2.2 percent with the Commission expecting a continued decline to 2 percent this year and 1.9 percent in 2020.  Growth in the EU’s Eastern European state should remain relatively healthy but will still record a decrease in comparison to 2018.

“Uncertainty and risks, both external and internal, are on the rise and start to take a toll on the pace of economic activity,” explains Valdis Dombrovskis, a Commission vice-president.
Among the external factors is the impact on European exports of global trade tensions.

These have been cited by the European Chemical Industry Council (Cefic), whose economic analysis covers the coatings sector, as a factor behind a 0.5 percent decline in chemicals output in 2018 with automobile manufacturing, a major customer industry, being hit by lower export demand. Cefic is forecasting a modest overall recovery of 0.5 percent growth in 2019.

However, many of these growth forecasts may turn out to be overoptimistic.  In mid-December IHS Markit’s purchasing managers index (PMI) of the 19-state eurozone was recording an unexpectedly sharp drop in economic activity. The London-based consultancy said that the eurozone PMI rate had dived to its lowest level for four years.

The PMI for Germany, Europe biggest economy and largest coatings sector, went down by seven percent in the second half of 2018. According to the European Commission, German GDP fell from 2.2 percent in 2017 to 1.7 last year (2018) with a slight rise to 1.8 percent being forecast for 2019.

The German Chemical Industry Association (VCI) is forecasting an overall 1.5 percent increase in chemicals and pharmaceuticals output this year compared with 2.5 percent in 2018.

Last year’s increase was driven by pharmaceuticals. Production in polymers, petrochemicals and consumer and personal care chemicals decreased by two to three percent. The paints and varnishes sector declined by around one percent.

IHS Markit’s purchasing managers index for the German construction sector dropped in October for the first time in seven months but then returned to modest growth in November. Much of any rise in construction activity in the country has been in the commercial and housing markets with the main weakness in civil engineering which has been static for over a year.  German construction growth is now well below that earlier in the year and in 2017, according to IHS Markit.

At the same time German automobile sales and production, already under pressure from trade conflicts in export markets outside Europe, started to drop dramatically in the autumn with the introduction across Europe of stricter car emission tests which showed vehicles to be less fuel efficient than previously thought.   In November alone, car sales in Germany went down by 10 percent.

“The slowdown of the automobile industry and the low growth in construction had a big impact (this year) on our industry,” said Christoph Maier, head of economic and financial affairs at the German Paint and Printing Ink Association (VdL), Frankfurt.

“We believe that even in 2019 the automobile industry will not fully recover and the growth of the construction industry will remain weak,” he added. “We expect similar figures in 2019 to those in 2018. Output could shrink again by about one percent with (sales up) by about 1 percent.”

The two Western European countries with the poorest performing economies this year (2019) will be Italy and the UK with the European Commission forecasting that each will record a GDP growth rate of 1.2 percent.  But UK’s could be much lower if it experiences a hard Brexit without a withdrawal deal with the EU which would mean that it would have to revert to the basic trading rules of the World Trade Organization (WTO) with its European neighbors.

The UK coatings industry is anxious about the impact of Brexit on trade with the remaining 27 EU member states which accounts for the majority of its export sales and imports of raw materials.  But it is even more anxious about the effect of a Brexit without a withdrawal agreement governing UK-EU trading relationships.

“If there is a ‘no deal’ Brexit, then there could be customs delays, tariffs and potential issues with transportation of goods and (access to EU) skilled workers,” explained Ellen Daniels, head of public affairs and policy at the British Coatings Federation (BCF). “There could be major supply chain disruption. For a just-in-time industry like coatings, this could result in stockpiling and potentially the loss of business.”

Some of the UK coatings industry’s major customer sectors, like automobiles and their components, are reliant on just-in-time supply chains which may no longer be able to function in the UK because Brexit will eliminate open UK-EU borders.

The exception could be the open border between Ireland, an EU member, and Northern Ireland, part of the UK, but even that is under threat especially if there is ‘no deal.’

The EU economy is so interdependent that an event like Brexit, let alone an economic downturn, has inevitably reverberations across Europe, especially in a broadly-based sector like coatings.