Is Europe de-industrialising?

Since 2018, European IP has underperformed relative to the economy as a whole, and in the year to 2024 Q1 it contracted by more than 3%. This has triggered fears of de-industrialisation in Europe.

The weaker trend in European IP performance seems to start around 2018, the same point at which a general increase in trade barriers started, leading many commentators to talk about the beginning of a process of de-globalisation. In particular, the combination of geopolitics and the experience of supply-chain disruptions following the pandemic has led to worsening trade relations between the West and China.

Has the turn away from relatively free flows in trade and investment since 2018 indirectly damaged European competitiveness? The evidence here is far from a conclusive “yes.”

There have been significant changes in the geographic structure of European imports. Between 2018 and 2023, Russia’s share in European (EU27 plus UK, Norway and Switzerland) imports has fallen by 6.4ppt, and China’s share by 10.6ppt. But export shares have changed less, with China’s share falling by only 1.2ppt. There is at best a weak correlation between exposure to China and export performance, at either a country or sector level. And while Europe has lost global market share in manufactured goods, this trend predates 2018 and has not accelerated since (see below).

China’s climb up the value chain threatens German industry

China’s changing role in the global economy does present challenges for Europe. European industry has a bar-bell structure – heavy at either end of the supply chain, and light in the middle. Relative to the world as a whole, Europe is more concentrated in consumer goods and capital goods, with a smaller share of value-added in intermediate goods as demonstrated in the below.

Germany is particularly overweight in capital goods, while France and Italy have more typical industrial structure. This industrial structure interacts with China’s development path. As China integrated into the world economy following WTO membership in 2001, it rapidly grew market share in consumer goods. This shock to world supply benefited consumers everywhere, but for consumer goods industries in the West, this meant fierce competition, impacting countries like Italy in particular. In contrast, China’s rapidly growing demand for capital goods during this period benefited Germany.

In the last five to ten years, the picture has shifted. China is trying to move up the value chain into capital goods, more complex intermediate goods (e.g. semi-conductors) and higher end consumer goods (e.g. EVs ). Since 2018, China has tended to gain market share in the same segments that Europe has lost it.

What does this mean for European industry? For now, Europe appears to be fairly successful at maintaining its remaining market share in consumer goods, despite facing significant competition from China in the capital goods and consumer durables sectors. This is likely to be more of a challenge for Germany, given its industrial structure, than for France and Italy. Nonetheless, the current biggest challenge for the European industrial sector remains energy costs.

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Has global BEV demand actually slowed down?

Concerns about a slowdown for BEVs have led some automotive manufacturers to scale back their electric vehicle plans. There is worry from some stakeholders that the shift to zero-emission vehicles might take longer than initially expected, raising doubts about achieving electrification targets. But has global BEV demand actually slowed down?

In the first four months of 2024, BEV sales increased by over 300,000 units y/y, up 13%, which is faster than the overall growth of light vehicle sales. This indicates that BEV sales continue to rise and gain market share on the global level.

However, examining the year-to-date global penetration rate of 10.1%, it is only slightly higher than the 9.3% recorded at the same time last year. The growth rate has decelerated more rapidly than anticipated, with the current penetration rate significantly below the 13.1% observed in the last quarter of 2023.

Read the full insight to learn more.