Manufacturing H1 Insight, H2 Outlook 2024

The first half of 2024 for Irish manufacturing got off to cautious start as inflation eased, supply chain predictability improved and ESG went mainstream, notes Bank of Ireland head of Manufacturing Sector Conor Magee in his H1 Insights and H2 2024 Outlook.

2024 – H1 Lookback

A cautious start as inflation eases, supply chain predictability improves, ESG goes mainstream, but global demand continues sluggish as a sustained upswing in new orders remains elusive.

Irish Manufacturing started 2024 on an asymmetric mix of optimism and caution. Optimism on the back of strong performance in 2023, but caution as demand slowed and manufacturing continued in contraction territory through H2 2023. Interest rate hikes across EU, US, and UK which have not been reversed, and have had the desired effect of constraining demand and slowing inflation. With that comes a correction and slowdown in manufacturing output.

However, Ireland’s rate of contraction has been slower and lagging that of its peers with Purchasing Managers’ Index (PMI)1 averaging 49.4 for H1 2024 compared to 46.3 for the EU, our biggest trading partner. These numbers however tell a composite story and different sub sectors are performing differently during 2024 as follows:

– Global PC sales have recovered with 3 consecutive quarters of year-on-year growth.

– EU Automotive registrations up YOY 4.5% H1 24 but down 18% on 2019. EVs volumes only grew by 1.3%.3 In Ireland year to end of July they have fallen by 24% compared to 2023.

– Global sales of Semiconductor manufacturing equipment expected to grow in 2024 by 3.4% driven by AI.

– Industrial construction equipment expected to fall in 2024 by 8%.

– Agri equipment are forecasting falls of 20 to 25% for year end 2024.

– Data centres, & Modular construction and sustainability retrofitting all continue strong.

– Continued growth in medical devices sales with CAGR forecasts of 6.1% to 2030.

– Pharma sales also expected to grow by 5.1% in 2024.

Irish Manufacturing is deeply anchored in all the above supply chains and so individual businesses will feel the pain differently.

Key Sector Trends

• Purchasing Managers Index (PMI) data: 2024 data has continued in contraction territory (<50) with June at 47.4, a 12-month low, but then a fragile recovery in July to 50.1.

EU data remains stubbornly low at 45.8 for July, with an accelerated decline in contraction of orders, output, and employment. Sluggish orders, lower production output, higher risk adversity, tighter spending, elevated interest rates, unpredictable geopolitics, and cautious business confidence all serve to dampen manufacturing activity.

• Supply Chain Resilience remains a top priority for manufacturing to maintain business continuity and protect reputation. The Global Supply Chain Volatility Index GSCVI10 for July at -0.22 is a reversal of earlier positive improvement signs and signals underutilisation of global supply chains.

Manufacturing would much rather be stretched but this continues to be elusive.

• Inflation (HICP) has eased to 1.5% in July 2024, down from 4.6% in 2023 but manufacturing input prices remain elevated.

2024

Container shipping costs are up 203% on this time last year from $1,832 to $5,551.12

– SMEs are passing on costs but not without pushback.

– Given higher price tags, lower spending capacity, consumers are delaying purchases or switching toservice offerings e.g., holidays and leisure.

• 2024 Irish GDP, Exports, and Industrial Output: – 2024 GDP grew 0.7% in Q1 and contracted 4% annually.

Manufacturing which contributes c. 35% to GDP, contracted 5.7% quarter on quarter and 15.5% annually. This is largely driven by the MNC sector and represents a correction from elevated activity in 2022 and 2023 to more normal levels.

– Exports H1 2024 increased by 7% YOY dominated by exports to US +23%, and sectors Pharma +21% and Machinery +20%.

– Production output June data is up 6.2% on a rolling 3mth. basis (Apr to June) but down 6.8% compared to same 3 mth. period in 2023, split between the modern sector -13.6% and the traditional sector +11.1%.

• Employment: Economy is at full employment and shortages of key technical skillsets are still the case. However, given the softening of manufacturing data, there are cases of capacity reductions and associated employment impact in certain sectors such as construction/agri. equipment where inventory levels are high.

• ESG, Digital and AI agendas gain momentum in 2024: All driven by a combination of digital transformation, supply chain reconfiguration, ESG metrics, regulatory compliance awareness, and higher fuel costs improving payback periods for electrification and renewable sources. Ireland emissions reduced by 6.8% in 2023 to their lowest level in three decades.

Solar energy has seen exponential growth and has passed the milestone of 1 Gigawatts (GW) in Ireland with a target of 8 GW for 2030.17 To put global solar growth in context, in 2004 it took one year to install 1 GW of solar. The forecast for 2024, is for 600GW installation of solar or 2GW per day.18

• Geopolitics, Rise in Protectionism and Strategic Autonomy: One of the lasting impacts of COVID-19 and accelerated by Russia Ukraine conflict has been the desire for major economies to have greater strategic autonomy and less reliance on global supply chains. It is a complex picture of economies moving away from mutual benefit to national gain and impossible to predict how it will play out. Irish manufacturing is in a strong position to navigate the impacts given the deep roots of both the MNC and SME manufacturing community.
• Trade restrictions on the increase: Globalisation is in reverse, with major economies retreating to protectionism mode. From 500 in 2015, trade restrictions have exponentially grown to nearly 3000 in 2023.19
• EV Tariffs: US and EU have imposed 100% and 37.6% respectively on Chinese EV imports.20

Global Elections: Roughly half of the globe are headed to the polls in 2024.21 Expect the level of protectionist measures to increase with potential impacts, which are difficult to quantify for the Multinational and SME manufacturing community.

Notwithstanding above, the reality is Irish Manufacturing enterprises have deep roots here, but nonetheless must plan for different outcome scenarios. In particular Government would be wise to model how corporation tax from manufacturing might be impacted. The Department of Finance has launched a major research project on the risks Ireland faces from deglobalisation, to be published after the summer.

Irish Manufacturing PMI 

PMI is a questionnaire sent to 250 manufacturing companies, and a result greater than 50 represents expansion. The last 12 months has been one of stubborn contraction with a return to steady growth in both Ireland and EU remaining elusive. Ireland is faring better with a 12-month average 49.5 compared to the EU averaging at 45.2.

However, as our biggest trading partner, there is a risk of contagion with downward capacity and employment adjustments to match lower demand levels. Some sub sectors such as Industrial Equipment have already adjusted to match moderated demand levels post the inflated Covid 19 period where uncertainty peaked demand above real needs. As high inventories unwind, interest rates remain high, input costs remain elevated demand will continue sluggish in the short to medium term.

Global Supply Chain Volatility Index (GSCVI) 

The Global Supply Chain Volatility Index, published by company GEP (a global leader in procurement and supply chain), based on data derived from a monthly survey of 27,000 businesses, has fallen from the dizzy heights of 6 in 2022 to below zero in July 2024 at -0.22.

US Economy Slowdown Fears: Manufacturing’s second biggest market after Europe, defied most 2023 economic forecasts of a recession and delivered growth of 2.5%.

H1 2024 has continued strong with a bull stock market on steroids which has been just recently had the brakes applied on the back of fears of recession in the absence of Fed rate cuts. Add to this consumer debt hit new highs in Q1 2024 and a historically high debt to GDP ratio of 124.7%, all points to a potential correction. However, and on an optimistic note, while views are mixed, many fundamental data points including employment, output, inflation are positive and strong and suggest that fears of a downturn may be misplaced.

Data for May and June pointed to tentative signs of demand strengthening in the supply chain and has now been reversed in July.

Demand for raw materials and semi-manufactured goods weakened in July, falling at fastest rate this year, signalling slowing global economic growth. The key drivers are:

• Global supply chain capacity rises, amid calls for a reversal in interest rate hikes.

• Asian factory demand, particularly China, is at its weakest since December 2023.
• Suppliers to North America report underutilised capacity.
• European market continues to struggle, with region’s manufacturing recession persisting.

In summary the latest data signals economic weakness as we head into the second half of 2024. We continue to see a combination of the other side of bullwhip effect i.e. gluts following oversupply, plus ongoing impact of dampened demand driven by inflation and high interest rates.

Imports, Exports, Industrial Output and Turnover

Imports and exports performance are summarised in table 3 for period H1 2024. In totality, imports were down YOY by 7%, while exports were up by 7%. Increase in exports is driven by US +23% and the Pharma and Medical Devices sector + 21%. Machinery and transport sector also up 20%. Looking at June alone, exports were down 10% YOY and down 61% YOY for Great Britain.

For Manufacturing production and turnover, production output is overall down 15% for H1 2024. This is made up of the modern sector which down by 18%, and by contrast the traditional sector which is up by 11%. The rolling 3-month comparison is positive for all metrics and suggests fragile improvement in activity overall.

Manufacturing Input Price Inflation

Inflation (HICP) has dropped in 2024 to 1.5% in July down from 4.6% July 2023 and from 2.7% January 2024. The EU figure for July was 2.6%. While this is welcome news, it stems from the fact that the comparison period is now firmly in the elevated prices zone and the reality is that manufacturing input prices continue high when compared to pre Covid-19 levels.

Lithium pricing is significantly down due to higher supply levels and a drop in EV demand.

Freight is significantly up and is attributed to longer routes by virtue of avoiding the Red Sea and adding up to 15 days in transit times (Table 7). In addition, availability of empty containers is reduced due to longer time been spent on water. Natural Gas pricing is contingent on mild winters and robust storage strategies. Steel is down significantly at -18% YOY and at its lowest level since 2016. Overcapacity in and demand drop due to construction crash in China are drivers here.

Wage inflation rose to 4.3% in June 2024, higher than 2.5% 2019 levels.27 This is an ongoing concern for SMEs as they are confronted with an array of cost increases including minimum wage, sick pay, pension enrolment. A laser focus on costs and margins will continue and given the risk of continued slump in EU, a further interest rate reduction is widely anticipated in September.

Spotlight on Northern Ireland and Comparison to UK and ROI

Following a recent visit to our office in Belfast, I thought it would be useful to share some data on Manufacturing in Northern Ireland.

Northern Ireland enjoys a thriving manufacturing sector supporting 88,000 direct jobs and contributing 14% of economic output.28 Home to a range of indigenous and well-known multinational players, Northern Ireland manufacturing subsectors include Industrial Equipment, Transport Equipment, Aerospace, Pharmaceutical, Medical Devices.

This comparison brings into stark focus how highly dependent the Irish Economy is on Manufacturing and indeed the contribution made from foreign direct investment (FDI) and our huge portfolio of multinationals in the technology and pharma spaces. At almost €700,000 contribution per employee, compared to €92K for UK, Ireland ranks the highest in productivity of OECD countries. This leadership position provokes considerable debate about our exposure here and in particular on the corporation tax front. Bottomline is our manufacturing eco system has deep roots and strong anchors here. We are the only English-speaking country in the EU, are highly educated, hardworking, and strong relationship builders.

However, with our strong lead and in the words of Shakespeare’s Henry IV, “Uneasy lies the head that wears the crown” – there is no room for complacency.

Funding Activity in the Sector

• Funding activity levels in the sector reflects a number of trends including:

– Caution in the sector given the uncertain macro-economic environment and ongoing geopolitical risks

– High and significantly increased deposit balances driven by a bumper years in 2022 & 2023

– High interest rate environment prevails

– Relief from higher working capital needs given improved supply chain dynamics

– Demand for funding stagnant at 18% according to a survey of 1,500 SMEs that was released in April 2024 33

– M&A deal volumes are up YOY from 195 to 207

• Funding was dominated by working capital followed by M&A, MBO transactions and capital expenditure
• BOI continue to support clients against supply interruptions and inflation
• There is a wait and see element on interest rates and for funding options which offer lower fixed rates and are green related

Tailwinds 2024

• Irish Manufacturing activity continues higher than pre Covid levels
• Irish Manufacturing activity higher than EU peers
• US Manufacturing continues to expand
• Further interest rate reductions in H2 2024
• Resilient to economic cycles
• SMEs continue to benefit from MNCs reconfiguring their supply chains to local and more secure partners
• Key sectors of Pharma, Medical Devices, Data Centres, Modular Construction all growing
• Generally strong balance sheets

Headwinds 2024

• PMI, Industrial output, and GDP data all point to a moderation in growth
• “Oversupply” during supply chain crisis has resulted in gluts in certain sectors and constrained new order activity
• Capacity adjustments will impact employment levels
• Complex Geopolitics with unintended and unpredicted consequences
• Input costs remain high, margins are under pressure and customers seeking reverse of increases
• Labour shortages and competition for certain talent in a tight market continues

Despite all the “unpredictability”, Irish Manufacturing is broadly positive for solid outcome in 2024. While overall growth may be on a knife edge, Irish Manufacturing is resilient and agile in navigating economic cycles. With a laser focus on costs and margins, combined with an eye for leveraging competitive advantage from green credentials, Irish manufacturing fundamentals are strong and well positioned for stronger growth in 2025.

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