Interview
What’s Next for European Capital Goods
- Long-term sector debates are accelerating toward localization and automation, with a strategic shift from emerging market growth and low-cost sourcing to efficient supply-demand matching and factory automation.
- Capital expenditure is projected to decline by a high single digit in 2020, approaching 20% for large-cap companies, with a full recovery to 2019 levels not expected until at best mid-2022.
- Investors anticipate a "slight pause" and "very moderate growth" for capital goods and industrials in 2021 and 2022, stemming from a slowdown in activity observed in the second half of 2019.
- Autos and aerospace/defense sectors face divergent recovery trajectories, with autos showing business metric improvements in July and August, while aerospace recovery is delayed by a significant demand shock.
- Green capital expenditure is expected to remain robust and unimpacted by the pandemic, driven by the European Green Deal and net-zero targets, affecting approximately 40% of companies regarding business model adjustments.
- Significant long-term investment activity is forecasted for rail traffic expansion and building renovation to meet energy-efficient standards, alongside continued automation and digitization for real-time supply chain control.
- China's high activity level is expected to persist from June onward, countering fears that March-May data represented solely pent-up demand.
- Recovery patterns in the U.S. and Europe are projected to show a slight lag in data declines, with recent July and August data described as "pretty strong."
- Management confidence in the recovery path is expected to be higher in Europe due to extensive furloughs and safety net support, while U.S. outlooks remain more cautious.
- Companies are expected to maintain cost base nimbleness even after government support programs and furlough schemes are removed, achieving better performance than in prior crises.
- The industry is moving away from early 2000s and financial crisis-era strategies toward a current and future focus on efficient automation to enable production near demand and social distancing.
- Some deferred capital projects may be rescheduled to move into the following year, and a "slight pause" in activity is specifically noted for 2021 and 2022 due to prior slowdowns.