H |
opes were high at the beginning of the year that 2002 would see the start of a sustained economic recovery in Europe and the rest of the industrialized world. The figures for the first few months appeared to show that the optimism was well founded. The leading global economies grew at 2.4 percent in the first half, and at the start of the summer, economists were predicting that those outside the U.S. would show positive signs of recovery, expanding at an annual 3.2 percent in the second half of the year.
Now, though, no one is quite so sure, and those figures have been revised down to 2.15 percent. Successive European governments have made disappointing announcements on growth. Germany’s figures for the second quarter — showing growth of just 1 percent — were not a one-off. They’ve been echoed in Italy, the Netherlands and elsewhere. And these numbers don’t reflect the huge economic impact of the disastrous floods that affected Europe in August.
So, despite occasional snippets of better news, such as the recent rebound in the U.K. manufacturing sector, most analysts are reluctant to predict an early recovery. It’s now thought that Eurozone growth will remain subdued in the second half of 2002 and is unlikely to be much above 1 percent for the year as a whole. Worsening industrial confidence, weak consumer demand and fears of a U.S. slowdown are the key factors. Gross domestic product growth for the full year is now forecast at around 1.2 percent, although growing numbers of private-sector economists are cutting their forecasts, and their expectations for 2003 are at best modest.
In other regions, the picture is no brighter. In Japan, industrial production has been unpredictable, with little domestic demand and unemployment at all-time highs. Some emerging markets, such as Korea, have begun to show signs of recovery, but for most of the developing economies, downward revisions are again the norm. Estimates for expected growth in developing countries have fallen from 4 percent in mid-summer to just 2.6 percent, dragged down by the continuing woes of Argentina, and the weakness of other Latin American economies.
Against this background, it’s not surprising that Europe has seen significant falls in Foreign Direct Investment. Since the global downturn began, figures for FDI have produced alarming reading. World FDI inflows plunged in 2001 by 51 percent, to US$735 billion, the largest decline in 30 years. The effects of the global slowdown have been compounded by the fall in the stock markets and a sharp decrease in cross-border mergers and acquisitions.
While the U.K. has retained its position as Europe’s top inward investment location, it has seen a marked decline from 2001’s record totals in the number of investment projects and jobs created. During the financial year to March 2002, Invest.UK recorded a drop of 12 percent in inward investment projects, and a huge fall — 52 percent — in the number of new jobs created.
Dr. Henry Loewendahl, Senior Consultant at Pricewater-houseCoopers-Plant Location International (developer of GILD — the Global Investment Location Database) says that some regions are clearly faring better than others. While FDI has declined both in terms of capital flows and number of projects since the middle of 2000, there has been a shift in investment, out of the major industrialized countries and into developing economies, he pointsout. In Eastern Europe, FDI has remained relatively strong. “There is a perception that Eastern Europe is becoming more stable, and that the region provides not only a low-cost location, but also an educated workforce and access to the EU market,” he explains.
At sector level, there are also clear differences in performance. While IT and software were dominating FDI in 1999 in terms of projects, the lead position is now held by the automotive sector. The chemicals sector has also performed well, maintaining its levels of investment, as have the semi-conductor and life science industries.
Significantly, Loewendahl emphasizes that even within the sectors that are performing badly, there are opportunities. While FDI in IT and software has slowed sharply, specific sub-sectors, such as security software, CRM software and the multi-media industry, have bucked the trend. Within the telecom industry, FDI continues in next generation research. “These trends mean that regions have to focus on niche competencies and target companies that operate in those areas,” he notes.
Oxford Intelligence (OI), which tracks companies investing in Europe and North America, is seeing similar trends. “Many companies are adopting a wait-and-see attitude regarding their FDI plans, until they have a clearer picture of how the economy will develop over the next few months,” says Peter Lemagnen, Commercial Director at OI. “As Central European countries head towards accession to the EU, they are becoming increasingly attractive as investment locations. And while there’s still a reasonable amount of investment coming from the traditionally active IT and software sectors, our research confirms the increasing importance of life science and other emerging industries to FDI.”
And what of the recovery? Henry Loewendahl has seen an increase in business of late across the whole range of sectors; he predicts an improvement in figures for FDI by the beginning of 2003, but doesn’t expect to see a complete recovery until the middle of next year. And in the wider economy, the same appears to be true, with few willing to bet on a sustained recovery by the end of the year. There is a belief that it will come, with low real interest rates helping to boost consumer spending and fiscal policies helping demand. But the time scale is less certain, and it will materialize more quickly in some countries than in others. What is certain, though, is that, once again, the US will lead the way. — Alison Semple
