Manufacturing gains traction despite a challenging environment
Spain’s manufacturing has been relatively successful in overcoming the impact of the various exogenous shocks that have shaken the European economic scenario in recent years.
Spain’s manufacturing has been relatively successful in overcoming the impact of the various exogenous shocks that have shaken the European economic scenario in recent years. First came the disruptions to global supply chains in the wake of the pandemic, which were followed in 2022 by the energy crisis triggered by the war in Ukraine, with the consequent impact on inflation and the tightening of the ECB’s monetary policy. Despite all the adversities, the sector recovered pre-pandemic levels in 2023, in terms of both GVA and employment, thanks to a relatively strong financial position, the easing of the bottlenecks and the containment of production costs.
In the wake of the energy shock triggered by the war in Ukraine, Spain’s manufacturing showed weak performance, although it held up better than that of other surrounding countries. This has essentially been due to the less prominent role of energy-intensive sectors in our country, together with a lower dependence on Russian gas, as well as our economy’s greater capacity to diversify its energy sources.
Spain’s manufacturing showed weak performance in 2023, although it held up better than that of other surrounding countries, essentially due to the our economy’s greater energy diversification
Looking back on 2023 we see a mix of positives and negatives. Firstly, gross value added (GVA) in real terms continued to grow, specifically by 3.3%, which is slightly below the rate of the previous year (4.4%) but above that of the economy as a whole (2.5%).13 As a result, by the end of 2023 it stood 3.6% higher than the pre-pandemic level of 2019. On the other hand, the number of registered workers grew by an annual average rate of 1.5%, falling short of the growth recorded in both 2022 (2.3%) and in the economy as a whole (2.7%). The fact that GVA grew in excess of employment shows the continuous improvements in productivity recorded by the manufacturing sector.
- 13. Manufacturing contributed 0.38 pps to GDP growth, marking the lowest contribution in three years (0.51 pps in 2022) but still above the 2014-2019 average (0.26 pps).
Positives and negatives in the manufacturing sector in 2023: the energy shock corrected faster than expected, but other limiting factors emerged
On a less positive note, following the extraordinary growth of the previous year (against a backdrop of a sharp price increases that reached 7.7% in 2022), turnover fell slightly in 2023 (–1.6%), while output (per the IPI) stagnated. Lastly, manufacturing exports, weighed down by higher costs and weaker foreign demand, registered a 7.6% decline in volume.14
- 14. In nominal terms, manufacturing exports fell by 0.4%.
In short, 2023 was a challenging year for the manufacturing sector. While the shocks that weighed down its performance in previous years gradually faded (in the case of the energy crisis, even faster than we had anticipated at the start of the year), new bearish factors appeared on the scene, including the weakening of our main trading partners and the rise in interest rates, which limited the sector’s growth.
The disruptions to global supply chains, which were felt in the second half of 2021 and especially in 2022, particularly affected certain branches of manufacturing, such as paper, metal products, electrical equipment and, most notably, computer products and motor vehicles, which had to deal with the microchip and semiconductor shortages.
During 2023, the tables turned and the manufacturing sector found itself operating in a more favourable environment. According to the quarterly business sentiment survey conducted by the European Commission, in Q1 2024 7.6% of manufacturing companies reported a shortage of materials or equipment as a limiting factor for their production. This is a significantly lower proportion than in the same survey a year earlier (19.0%) and, above all, in 2022 as a whole, when it exceeded 26.0%.
The manufacturing sector is now in a better position to face new disruptive episodes in the global markets
More recently, the attacks on merchant ships in the Red Sea by the Houthi rebels in Yemen since mid-December are forcing them to take longer alternative routes, with the consequent increase in transport costs. However, the current increase in costs is not as sharp as the one that occurred during the pandemic, so the impact of this situation on manufacturing production ought to be very contained for now. Contributing to this contained impact is the weakness of global demand, as well as the decongestion in the logistics industry prior to the attacks.15
- 15. Bank of Spain (2024): «What does the Banco de España’s bottleneck index tell us about the economic impact of the tensions in the Red Sea?», blog post of 31 January.
While it is true that the energy crisis was resolved faster than expected and energy prices fell very significantly following the sharp spike of the previous year, the impact of the cost increase was gradually absorbed during the course of 2023; that is, the consequences of the energy shock of 2022 continued to have a significant impact on the manufacturing sector in 2023. Within the context of weak performance in the manufacturing over the last two years, the pattern has not been equal across all sectors, depending essentially on their degree of exposure to the rise in international oil and gas prices: it was the branches of industry that are most dependant on an intensive use of these inputs that showed the greatest fragility16 (see the following series of charts). These branches include construction (which includes metallurgy and the manufacture of non-metallic mineral products and metal products), paper, chemicals, timber and plastics.17
- 16. The manufacturing branches most exposed to the energy shock are identified using the input-output tables published by the National Statistics Institute (INE) for the year 2016, from which the relative weight of energy within each branch’s cost structure can be identified. For further details, see «Rising energy prices and their impact on the manufacturing industry: which sectors are being hit the hardest?», in the Manufacturing Industry Sector Report 2022.
- 17. The coke and oil refining sector is excluded, as it could distort the analysis.
The rise in international oil and gas prices, triggered by the war in Ukraine, has had a significant impact on the manufacturing energy costs
Activity indicators in the manufacturing sector
Manufacturing output in the most energy-dependent branches fell by 3.9% in 2023, compared with 5.6% growth in the rest of the branches, causing the levels of December 2023 to remain below those of 2021 (–5.3% vs. 14.4% for the other branches). In terms of employment, the number of registered workers in the branches most exposed to the shock grew in December 2023 by 1.2% year-on-year and by 2.2% compared to December 2021, again below the other branches (2.0% and 3.7%, respectively).
As for turnover, the decrease recorded in 2023 by the energy-intensive branches (–8.9%) stands in stark contrast with the increase in the rest (+6.0%): compared to 2021, the levels were 7.6% and 33.0% higher, respectively. Finally, the deterioration of exports in 2023 was widespread across the various branches of manufacturing, although it was deeper in the energy-intensive ones, which experienced a 9.0% decline in volume (–6.4% in the other branches); as a result, the former accumulated a 14.8% decline compared to 2021 levels, in contrast with the other branches, where exports are 3.7% above 2021 levels.
Although the rise in production costs in recent years has been largely driven by energy prices, other commodities and intermediate goods have also been affected, with the consequent impact on the manufacturing sector.18 Following significant growth in 2021 and 2022, intermediate consumption registered a slight decrease last year (–0.4%), as a result of the decline in the value of imports (–1.4%) in a context of containment of international energy prices, while this was partially offset by the slight increase in domestic purchases (+0.1%).
- 18. It is the sector most affected by episodes of this nature, given that the value of its intermediate consumption is equivalent to around three quarters of its revenues – a far higher proportion than in services or agriculture, forestry and fishing (38% and 45%, respectively).
The containment of intermediate consumption in 2023 allowed manufacturing to moderate its strategy of sharp sales price increases which it had implemented in previous years to offset the cost pressures. Thus, whereas in 2022 the revenues of these companies grew by 17.4%, driven partly by increases in sales volumes (+4.1%) but above all by higher sales prices (+12.7%), in 2023 the growth in revenues was 2.6%, with prices rising by 2.8% and sales volume remaining practically stagnant.
The moderation of the costs of commodities and intermediate goods has enabled a reversal of the price increases in the manufacturing sector
Through this price strategy, manufacturing has managed to cushion the increase in costs of recent years while simultaneously sustaining its profit levels. In this regard, sales margins in industry, excluding the energy and food sectors, began to climb in late 2022, eventually surpassing pre-pandemic levels in Q3 2023. This recovery has been largely supported by the reduction in commodity prices and is concentrated in the sectors related to the production of capital goods and transport equipment; in other branches, their profits have recovered to a lesser extent and they remain slightly below pre-pandemic levels.19
- 19. Bank of Spain (2024): Observatorio de Márgenes Empresariales, Quarterly report of Q3 2023.
The financing costs of manufacturing firms have increased as the rise in market interest rates has gradually translated to the cost of loans. According to the Bank of Spain’s quarterly balance sheet database, the cost of loan instalments relative to net revenues (the so-called finance burden) in the manufacturing sector (excluding the energy and refining industries) was 10.9% in the first three quarters of 2023 (compared to 5.9% in 2022 and 7.9% in 2019). In any event, the increase in the finance burden has not been as pronounced as it otherwise would have been, thanks to the reduced indebtedness of the manufacturing sector and stronger business earnings.20 Also, 2023 will have marked the height of the impact of the tighter financial conditions on loan repayments, as market interest rates have already fallen from their peak of last autumn and they are expected to continue to decline throughout 2024. In any case, market expectations suggest that interest rates will remain slightly above the levels of 2021, before the monetary tightening cycle began.
- 20. See «Report on the financial situation of households and firms, second half of 2023», Bank of Spain, January 2024.
Reduced indebtedness and improved business earnings have mitigated the impact of the rise in interest rates on the manufacturing sector
According to the ECB’s semi-annual survey on access to finance of enterprises (SAFE), out of the four major euro area countries, Spain is the only one where the percentage of financially vulnerable companies fell:21 in mid-2023 it stood at 7.3%, a similar percentage to that of France and 2 points lower than that of Germany and Italy. The funding gap,22 meanwhile, which had increased sharply in 2022 when interest rates began to rise, remained positive but narrowed significantly in 2023. In particular, 4% of companies reported a widening of this gap (compared to 6% in the previous survey), while in the case of industry the percentage fell even further, reaching 1% compared to the previous 11%, while expectations for the availability of financing also improved.
- 21. A company is considered vulnerable if it simultaneously records a fall in its turnover and profits, an increase in its interest expenses and an increase or stabilisation of its debt-to-asset ratio during the previous six months.
- 22. Difference between the needs and availability of external financing, in net terms; i.e. the percentage of companies that report that they have registered an increase in this gap, less the percentage of those that report a decrease.
The Spanish economy ended 2023 with stronger growth than expected, mainly thanks to the energy crisis being resolved quicker than had been anticipated, as well as the strength of Spain’s foreign sector, which was closely linked to services (both tourism and non-tourism). The expectations for Spain’s economy in 2024 are encouraging. Although the context at the beginning of the year will remain marked by geopolitical uncertainty and high interest rates, other factors will support growth, especially the strength of household spending, thanks to solid household finances and the gradual recovery of purchasing power, as well as the deployment of NGEU funds. Consequently, all the indicators suggest that the economy will gradually gain traction during the course of the year to achieve growth of 1.9% for the year as a whole – well above that of the euro area.
All the indicators suggest that the economy will gradually gain traction during the course of the year to achieve growth of 1.9% for the year as a whole
In this relatively favourable context, we expect the buoyancy that manufacturing is currently enjoying will persist, albeit with slightly less rapid growth. Thus, the sector’s GVA will grow by around 1.8% in 2024, a rate very close to that of the economy as a whole. Looking at the breakdown by branch of industry, according to CaixaBank’s Sectoral Indicator, in recent months transport equipment has performed particularly well, in contrast to the paper, graphics and textile industries, which are showing the weakest performance.
