MEDIUM RISK for entreprises
The economy performed very well in 2018. GDP growth, expected to be 2.9% for the year, tied 2015 for the strongest of the nine year recovery. Recent growth was particularly impressive in Q2 at 4.2% q/q annualized and 3.5% in Q3. The all-important consumer sector flexed its muscles at 3.8% and 3.6% in Q2 and Q3.
China-U.S. trade talks got off to a good start on Monday. Vice Premier Liu He unexpectedly participated in the talks that were supposed to gather low ranking officials.
Newly sworn-in president Bolsonaro benefits from a honeymoon with financial markets and recovering business activity; the Manufacturing PMI ended the year close to an eight-month high.
As one of the most cyclical sectors, synchronised economic growth will buoy activity in the machinery sector across all major regions. 2017 was the best year for the sector since 2011 on various accounts and the outlook remains positive: Business confidence in Europe stands at two year highs as does US industrial production. For a very export driven sector, global trade growth of +6.8% (EH forecast 2018 in nominal terms) USD weakness will support activity as about 50% of machinery exports happen in USD. All of the major end markets are expected to deliver growth: Construction equipment sales growth +3.4% y/y 2018, mining capex +7% 2018, oil & gas capex +4% globally / +11% US Independents (source all: Bloomberg consensus). The commodity sectors (oil/gas, mining) are coming out of recovery and likely to increase capex, driven by strong pricing and cash flow growth while. Construction remains buoyant albeit with the caveat of slowdown in China. New infrastructure investment, namely in the US should drive orders of construction equipment. While rising commodities and materials costs, which can account for up to 75% of the total cost base in certain sectors, pose a risk to profitability, at this point, pricing power is strong enough to protect margins. On average, solid double-digit sector earnings growth is evidence of the recovery, to +34% y/y according to Bloomberg consensus.
Robotics manufacturers: The sector benefits from a secular growth trend in fab automation. Automotive is a strong driver but also electronics and other sectors
Heavy manufacturing machinery: Sustained growth in industrial manufacturing should continue to support sector order books
Specialised technologies: Global economic activity along with recovery in mining and structural demand related to clean energy and sustainable manufacturing underpin activity
Contact Euler Hermes
Economic Research Team
Sector Risk Analyst