The manufacturing sector in the second quarter of 2024. Pozza – manufacturing still in the midst of uncertainty.

Treviso, August 8, 2024

Statement from President Mario Pozza

We are still in the middle of the stream – remarked President Mario Pozza, using this metaphor to describe the current economic situation in the manufacturing sector of the Treviso and Belluno provinces: neither worsening nor improving. Production levels in these regions have remained almost unchanged from the first quarter of 2024. Similarly, the utilization rate of production facilities has stagnated at 70% of total capacity. There are, however, some positive signs regarding foreign order intake, both compared to the first quarter of 2024 and on an annual basis. This trend seems to hold promise for the coming months as well.

Yet, President Pozza immediately cautions that, this is not the case for all sectors. When examining foreign demand, the wood furniture industry in Treviso, which was struggling in the previous quarter, shows a strong recovery. In Belluno, the eyewear sector continues its steady positive trend, while the rest of the fashion system remains stagnant in both provinces. However, the foreign order intake for the industrial machinery sector, which is significant in both Treviso and Belluno, continues to be negative. Pozza attributes this to ongoing uncertainties in the global market, which discourage investments, as well as specific markets affected by international crises that are not fueling demand.

The transport sector is also suffering, especially in the segment closely tied to the German automotive supply chain, which has become entangled in a hasty transition to electric mobility. Beyond the issue of infrastructure (charging stations, renewable energy), who can afford small cars that cost twice as much as their gasoline-powered counterparts? This limited market absorption capacity is causing car manufacturers to scale back production plans, with evident repercussions in our region as well. Foreign orders in the transport sector have decreased by 4.2% quarter-on-quarter and by 5.0% year-on-year. Production has also seen a year-on-year decline of 5.7%.

We are also in the middle of the stream when it comes to the broader economic conditions that influence the industrial sector. On one hand, the shocks related to raw material costs are partially resolving, but inflation is not declining as expected, leading central banks to exercise greater caution in reducing interest rates, which in turn negatively impacts investment propensity, as previously mentioned concerning the reduced demand for industrial machinery.

However, trying to remain optimistic, Pozza notes that the good news is that the Eurozone, having reactivated nuclear power plants in France and pushed for renewable energy, is becoming less dependent on fossil fuels. Moreover, despite the current economic slowdown, the labor market remains near full employment (because talent has become a scarce commodity). If these developments result in lower costs for European families and businesses, consumption and the competitiveness of companies could increase, with overall benefits for foreign trade. This would provide a foundation for strengthening the emerging signs of recovery in foreign demand, as reported by our Veneto entrepreneurs in certain sectors.

Caution is warranted, but forecasts suggest a potential increase in foreign demand, which we must be prepared to seize as businesses and as a system of supporting institutions. It is essential, Pozza concludes in his role as President of Assocamerestero, to look not only at European markets but also beyond Europe, as there are many opportunities worldwide that can be harnessed, with the support of Assocamerestero. A region distinguishes itself precisely by its ability to discover new markets.

The International and National Context

The fundamental themes characterizing the international economy remain consistent with those observed in the previous report. The new IMF forecasts, published in the July “World Economic Outlook,” show little deviation from the outlook presented in April. Overall, this is “not good news, as some anticipated improvements in the scenario have not materialized,” as commented by the analysts at Congiunturaref (Issue No. 13, July 10, 2024).

The economic cycle is currently in a sort of “middle ground”: some past issues (such as raw material costs and inflation) are improving, though with hesitations in the downward trajectory. At the same time, expectations for interest rate cuts by central banks have been scaled back; international demand remains weak, reflecting the expected normalization in consumer behavior that has been frequently discussed; and fiscal policies have shifted from an expansionary stance back to concerns about public finance balances.

This situation explains the continued stagnation in global industry, partly due to the stockpiling strategies adopted by companies in the past to mitigate the well-known supply chain risks experienced between 2020 and 2022.

Looking ahead to the next semester and into 2025, as the problems generated by various supply-side shocks are gradually and partially absorbed, it is possible that the economic cycle may see improvement.

Uncertainty will persist, especially on the geopolitical front; however, there are some underlying conditions that, barring unforeseen events, could provide more concrete paths to recovery, particularly in the Eurozone. Stabilization of raw materials, investment flows into renewables, and the resumption of nuclear energy in France, which have reduced dependency on fossil fuels, along with a labor market near full employment despite the current economic slowdown, are all factors that should, even with more restrictive fiscal policies, restore purchasing power to households and competitiveness to businesses, with positive impacts on foreign trade.

This is precisely the aspect that emerges from the survey on Veneto manufacturing and its provinces in the second quarter of 2024. The production dynamic remains weak, but the indicator that tends most towards the positive, especially in certain sectors, is precisely that relating to foreign order intake. This trend is evident both in comparison to the first quarter of the year and in projections for the next semester.

The Manufacturing Dynamics of Treviso and Belluno

The detailed data on the performance of Treviso’s manufacturing sector [1] clearly illustrate the situation described above. Production is stagnant, with a gross quarterly variation of +2.8%, which translates to a seasonally adjusted increase of just +0.6%. On an annual basis, the gain is almost negligible at +0.5%. Consequently, the utilization rate of production facilities remains unchanged at 71.6%, reflecting the various flexibility measures adopted by companies, including extended holiday periods.

[1] Survey on a sample of 2,174 businesses with at least 10 employees in Veneto, including 76 businesses from the province of Belluno and 475 businesses from the province of Treviso.

Significant gains are seen in revenues: gross quarterly variation is +4.6% (seasonally adjusted to +1.5%). On an annual basis, growth is modest at +1.0% (rising to +2.9% for foreign revenues).

The most noteworthy trends, as previously mentioned, concern foreign orders: gross quarterly variation stands at +3.6%, nearly consistent with the previous survey. However, the seasonally adjusted variation (+1.1%) tempers optimism, although it remains above the regional average (+0.4%). The furniture sector, which experienced a critical phase following the surge in orders during the pandemic, seems to be driving these initial signs of a foreign demand recovery in the Treviso area.

This cautious revival in foreign demand has yet to significantly impact domestic orders, which remain stagnant in the Treviso province. However, the order book remains stable, with the number of days of production assured returning to nearly 52, up from the 50 days recorded at the end of 2023. It is worth noting that this production outlook aligns with, if not exceeds, the levels observed in the 2018-2019 biennium before the COVID-19 pandemic.

The upcoming quarter is unlikely to bring significant changes to this overall picture, either positively or negatively. During the period encompassing the summer holidays, the majority of entrepreneurs anticipate stability across most monitored indicators. However, there is a slight prevalence of optimism regarding foreign demand: 36% of entrepreneurs expect an increase in orders, compared to 34% who foresee stability and 30% who fear declines.

The performance of Belluno’s manufacturing sector (see footnote 1 for the sample size) closely mirrors the overall scenario described above, although amplified by the seasonality of the eyewear industry and the smaller sample size of surveyed companies.

Production remains steady compared to the first part of 2024, with a gross quarterly variation of +1.3%, adjusted to just +0.1%. The utilization rate of production facilities remains unchanged at 70%, the same as in the previous quarter, excluding decimal points. On an annual basis, production has decreased by -2.6%, but this figure should be understood within the context of the ongoing normalization process following the post-COVID “roller coaster” effects.

Revenues remain stable for the quarter under review, while on an annual basis, there is a recovery of +4.0% (+10.4% for foreign revenues) after the significant decline recorded throughout the second half of 2023.

Foreign order intake is also rebounding in Belluno’s manufacturing sector: gross quarterly variation, though effectively stationary, becomes +1.1% when seasonally adjusted. On an annual basis, foreign demand has increased by +5.1%. However, this positive trend has not yet extended to domestic orders (which remain stationary on an annual basis and show a slight decline on a quarterly basis). Nonetheless, similar to Treviso, the production horizon secured by the order backlog has slightly strengthened, now standing at 57.4 days compared to 55.5 days at the end of 2023.

The situation appears poised for improvement if the business owners’ expectations regarding foreign demand are confirmed: nearly an absolute majority (48%) anticipate an increase, while 24% foresee a risk of contraction. A similar distribution of opinions, leaning towards optimism, is observed for revenue, with 50% of entrepreneurs expecting growth compared to 19% who fear a decline. As for production and domestic demand, most opinions indicate stability, though the balance between those forecasting increases and decreases still favors the former.

(Footnote 1) The sample size for the survey was 1,282 companies in the Treviso province and 244 companies in the Belluno province.

The Regional Dynamics by Sector

The sectoral dynamics, which have statistical significance only at the regional level due to the sample’s structure, allow us to move beyond the average data for the manufacturing sector and highlight any asymmetries compared to the overall picture discussed so far. We focus on quarterly variations, which better measure the current momentum of the sectors, including any accelerations or decelerations compared to the first three months of the year.

Indeed, as previously mentioned, the wood and furniture sector seems to be experiencing a significant recovery in its economic momentum across all four key indicators monitored: production, revenue, domestic orders, and foreign orders. The momentum is also strong for the home appliances sector (electrical and electronic machinery) and the food and beverage industry. However, the recovery in the wood and furniture sector is particularly noteworthy because it follows several quarters of stagnation.

The rubber-plastics sector and industrial machinery also belong to the group of sectors showing a good recovery in momentum, particularly in terms of production. However, challenges remain for these sectors: the rubber-plastics sector faces a decline in order intake from the Italian market, possibly due to the slowdown in construction following adjustments to fiscal support measures for the sector. The industrial machinery sector is experiencing a significant decline in foreign orders, reflecting continued uncertainty regarding investment propensity. This decline is partially offset by an increase in domestic orders, possibly due to the early effects of the “Nuova Sabatini” initiative.

The eyewear sector is performing well in terms of production and foreign order intake, but it shows negative trends in revenue and domestic order intake.

The following sectors are lagging: the fashion system, the metal industry, and transport equipment. The fashion system is still struggling with order intake from the Italian market, and both foreign demand and trends in production and revenue remain weak, although not in negative territory. The metal industry, as a whole, is moving at a steady pace, but with highly diverse situations within it. The decline in orders compared to the previous quarter appears to be driven by a “stop and go” dynamic linked to stockpiling, as companies feared that the Suez Canal crisis would lead to critical shortages of ferrous materials.

The transport equipment sector is particularly affected by the impasse in the German automotive supply chain and the hasty transition to electric vehicles, ideologically supported by Brussels without considering market absorption capacity. Some well-known German brands have become entangled in this situation and are now forced to adjust their production plans. The Veneto manufacturing sector, closely tied to this supply chain, is feeling the impact: foreign orders have sharply declined, and production remains stagnant.