The manufacturing industry during the pandemic
Although manufacturing is not among the sectors hardest hit by the crisis, the COVID-19 shock occurred within a context of a prolonged weakness in the sector, not only in Spain but in Europe as a whole. After the initial harsh adjustment, brief and uneven across the various branches of activity, the sector quickly picked up again, approaching its pre-pandemic levels of activity and employment. The outlook for 2021 and 2022 is favourable, driven especially by exports and the investments made via the Recovery, Transformation and Resilience Plan (RTRP). Recent disruptions in global supply chains, caused by global transportation bottlenecks and component shortages, will have a limited, temporary impact.
The crisis caused by the COVID-19 pandemic shattered the global economic and financial scenario in 2020. In just two months (March and April), the strict lockdowns and stoppages adopted to halt the spread of the virus caused an unprecedented shock in the world’s major economies, with GDP plummeting in Q2 2020. This was followed, however, by a strong rebound as the health crisis was brought under control and lockdown measures were lifted. Nevertheless, after the summer the recovery gradually lost momentum against a background of successive outbreaks, once again forcing restrictions on activity for a large proportion of services in the main developed economies. As a result, in 2020 we witnessed a recession that is historic in its intensity – the most severe since the Second World War – but also in its brevity.
In Spain, the extraordinary measures adopted to contain the spread of the virus limited people’s movements and paralysed a large part of production, resulting in a record decline in GDP in the first half of the year (–22.2% compared to the end of 2019). The gradual lifting of restrictions allowed a phase of reactivation to begin, albeit incomplete and asymmetric across the different regions and sectors, so the year ended with a 10.8% drop in GDP, making us one of the worst hit countries in our environment, for several reasons. On the one hand, at the beginning of the crisis the effects of the pandemic were relatively more unfavourable and restrictions harsher in Spain. On the other hand, the large share of tertiary activities has also played an important role, especially those related to tourism (hotels, restaurants, leisure and transport), which are very labour-intensive and depend to a larger degree on social interaction, as well as some of the characteristics of our manufacturing industry, such as the large number of temporary workers and small company size.
and adverse weather conditions marked the close of 2020 and the beginning of 2021.
As expected, the de-escalation and lifting of restrictions from May onwards encouraged a strong recovery in activity, boosting GDP to post 17.1% quarter-on-quarter growth in Q3 2020, a record-breaking rise. This strong upturn was largely driven by consumer spending as a large part of the pent-up demand that could not be met in the first part of the year was fulfilled. However, the downward trend over the quarter forewarned of the sharp slowdown that would occur after the summer as a result of the impact of the second wave of the pandemic, which forced the adoption of new containment measures to curb the rise in infections; as a result, GDP stagnated in the last quarter of the year and activity levels stood at 8.9% below those at the end of 2019.
The start of 2021 hasn’t been any better. The impact of a third wave of the virus, with the consequent intensification of restrictions, was compounded by the Filomena weather front that caused serious mobility problems and paralysed much of the country, especially in the centre of the peninsula. GDP resumed its downward path in Q1 2021 with a slight fall of 0.5% quarter-on-quarter and the economy was 9.4% below its pre-crisis levels (Q4 2019). On a positive note, an upward trend in activity began to be observed in March and continued in the second quarter, which makes us optimistic and confident that the recovery of the economy will consolidate over the coming months. Progress in the vaccination rollout, the lifting of restrictions and reduction in uncertainty will contribute to this, which in turn will help to reactivate consumption and flows of international tourists, of vital importance to Spain’s economy. We should also add the positive impact provided by the implementation of projects linked to the Next Generation EU (NGEU) funds.
CaixaBank Research’s GDP growth forecast remains at 6.0% for 2021 and 4.8% for 2022. Thanks to this remarkable rebound in activity, GDP could reach its pre-crisis level by 2023.
Europe’s manufacturing industry was not doing well when the pandemic crisis erupted. To a large extent, this weakness was related to trade tensions between the US and China and the disruptions in The automotive industry, a sector immersed in a technological transformation, partly due to the need to adapt its production to the new European environmental regulations.16
- 16. See «Spain’s automotive industry: strategic and undergoing a transformation» in this Sector Report, and «The difficulties of the global manufacturing sector» published in the Monthly Report of December 2019.
was stronger than on the economy as a whole, although its subsequent recovery was also
The adjustment undergone by manufacturing in terms of GVA in Q2 2020 was sharper than for the economy as a whole, a phenomenon that was observed across the board in most European countries (as can be seen in the charts below) but which was particularly marked in Spain: manufacturing GVA plummeted by 28.5% in Q2 2020 compared to Q4 2019, outstripping the decline in GDP (–22.2%). Consequently, the sector lost relative weight in the economy as a whole in Q2 2020, contributing 10.4% of GDP, the lowest since the series began in 1995, compared to the 11.2% registered in 2019 as a whole.
However, the sector recovered more quickly: in Q4 2020, manufacturing GVA in Spain was «only» 3.7% below its pre-crisis level, a gap that is narrower than the one recorded by its French and German counterparts. The reason for this rapid improvement was the fact that, unlike other activities that were more limited by the measures to curb the coronavirus, since May there have been hardly any restrictions to activity and, in addition, two important sales channels, exports and online trade, have remained active.
GDP and GVA of the manufacturing sector
GVA manufacturers versus GDP
GVA manufacturers versus GDP
High-frequency activity indicators show that manufacturing business has continued its recovery in the first few months of 2021. The industrial production index (IPI) shows that manufacturing has been improving and progressively approaching its pre-COVID-19 levels, albeit not without its ups and downs as a result of the restrictions adopted to deal with the successive waves of COVID-19. In March (the latest data available), the manufacturing IPI was 5.6% below its figure for March 2019, almost half the fall recorded in 2020 as a whole (–10.4%). Other activity indicators, such as turnover, show a similar trend.
Indicators of the manufacturing sector
Annual change (%)
The pandemic hit the labour market very hard as the closure of non-core activities affected most manufacturing branches, with some exceptions such as the food and pharmaceutical industries. However, job losses were cushioned by the extensive use of temporary employment adjustment schemes: in the manufacturing sector as a whole, almost 327,000 workers registered with Social Security, 16.3% of the total, had been furloughed in May. Although this percentage is 3 points lower than the national figure, it hides huge differences between the different branches of activity: while in the textile and furniture industry it exceeded 30%, in the oil refining and pharmaceutical industries it was less than 2%.
Registered workers in manufacturing
Furloughs in manufacturing by type of suspension
given that the sector has a lower proportion of furloughed workers, and many of them only partly.
After the second and third waves, and with the progress being made by the vaccination campaign, we are witnessing a gradual recovery in employment, albeit incomplete and uneven across the different areas of activity. In April 2021 (latest data available), 2.1% of workers were still furloughed and effective employment in the sector (total registered workers discounting those furloughed) was slightly below two million, 3.6% less than in April 2019. Only three activities (pharmaceuticals, computer products and chemicals) exceeded these employment levels, in contrast to the textile branches (clothing, leather and footwear) which were more than 20% lower.
Manufacturing has not only seen a relatively low percentage of furloughs compared with the economy as a whole (3.6%) but also 40% of the cases are partial furloughs (compared with 31% for the economy as a whole), which is undoubtedly a positive sign insofar as it seems more likely that these workers will keep their jobs.
Synthetic index for activity in the manufacturing branches
Change in the synthetic activity index in March 2021 (compared to March 2019)
The following can be seen from the above chart, whose horizontal axis shows the average for the indicator in 2020 (i.e. the extent of the shock) and whose vertical axis indicates the recovery in March 2021:
- The textile branches (footwear and clothing) are not only the hardest hit by the crisis, they have also barely recovered (in the chart, the bubbles are very close to the straight red dotted line of 45 degrees), although it is true that their relative weight in the sector as a whole is limited (small bubbles). Restrictions, and especially lockdown, led to less demand for these goods. In this respect, the lifting of commercial restrictions, together with the savings accumulated by households and pent-up demand, invite optimism regarding the trend for these sectors over the coming months.
- The automotive, graphic arts and beverage industries were also hard hit and their recovery is incomplete. The automotive sector is analysed in depth in the article «The automotive sector in Spain: strategic and undergoing a transforming» in this report. In the case of the production of beverages, this was hit very badly by the stoppages in the HORECA channel. The reopening of hospitality establishments and the revival of tourism will have a positive effect on this sector.
- The food and chemical industries have been scarcely affected and are recovering rapidly. Both benefit from the fact that they supply essentials, such as food, and other products needed to combat the pandemic, namely antiseptics, disinfectants, etc.
- The manufacture of pharmaceutical products has hardly suffered from the shock as the crisis is health-related, and this is the manufacturing branch that has performed the best, followed by the manufacture of computer, electronic and optical products.
- There is also a negative correlation between the size of the shock and some more structural variables, such as productivity, innovation intensity and the international openness of manufacturing branches. This suggests those branches with more innovative, productive and internationalised companies have weathered the storm better.
in contrast to food, chemicals and pharmaceuticals.
Exports of manufactured goods, which account for 89% of all goods sold abroad, fell by 10.7% in 2020 to a total of 232 billion euros, breaking a decade of uninterrupted growth.17 However, in a context of plummeting domestic demand, imports fell more sharply (–12%), so that the trade deficit decreased by almost 85% to just 735 million euros, the smallest in six years.
- 17. According to WTO data for 2019, Spain ranks sixth in the EU and 15th in the world among exporters of manufactured goods, with a global market share of 1.8%.
and pharmaceutical products managed to remain in the black.
The fall in exports in 2020 was almost universal, with the exception of sales in the agrifood sector (+4.2%), pharmaceuticals (+5.6%) and, to a lesser extent, furniture and other manufacturing industries (+0.5%). At the opposite end of the scale were the automotive industry (–15.9%), textiles and footwear (–18.5%) and, above all, oil refining (–38.4%), largely due to the slump in prices.
The main destination countries were our EU partners; in particular, four of them (France, Germany, Italy and Portugal) accounted for 42% of the exports of manufactured goods: the main products came from the automotive industry in all cases, except for Portugal, which bought mainly products from the agrifood industry, especially meat products. The first non-EU destination is the US, which is in sixth place, with 5% of all manufacturing exports, while China is eighth with 3.1%: Notable in the first case are the sales of oils and, in the second, of meat products.
Exports of manufactured goods
have boosted exports at the start of the year.
The first few months of 2021 have seen a weak but widespread improvement in manufacturing exports. However, in Q1 2021 they were still negative, posting a 1.0% drop compared to Q1 2019. On the positive side, agrifood exports continued to perform well (+15.8%), joined by those of computer and electronic products (+7.8%) and chemicals (+2.1%). On the other hand, exports of automotive, textile and footwear and oil refining products recorded double-digit decreases.
Thanks to the rapid recovery of international trade, after the collapse of goods trade in the first few months of last year, exports may become a lever for growth in 2021 and facilitate a dynamic exit from the crisis.
In a context of incipient recovery in the sector (the manufacturing PMI in April was at its highest level since 1999), some disruptions have arisen in supply chains due to bottlenecks in global transport and shortages of some components (semiconductors, microchips, metals, plastic raw materials, etc.), which could slow down production. This is confirmed by April’s PMI, which indicates that business orders pending completion recorded the second strongest rise in the series, which began almost 19 years ago.
threaten the recovery for manufacturing.
Firstly, the rapid and strong increase in demand for certain inputs for industry has found supply to be somewhat rigid as it has not increased at the same rate. Moreover, there has been a shortage of microchips, whose production is concentrated among a few East Asian manufacturers,18 undoubtedly aggravated by the considerable demand for electronic devices during the 2020 lockdowns but also by specific events, such as the cold snap in Texas in February, which forced production to stop, the fire in March at a Renesas factory in Japan and severe drought in Taiwan.19 As a result, the price of some materials has soared: the London Metal Exchange (LME) metals index has posted a cumulative increase of 24.9% since the end of 2020.20
- 18. Basically, Taiwan, Korea and Japan. The Taiwan Semiconductor Manufacturing Company (TSMC) controls 60% of global production and 90% of the advanced microchip market, according to Bain&Company estimates.
- 19. Large quantities of water are used in the production of semiconductors.
- 20. Latest figure: 13 May.
London Metal Exchange (LME) Index
Baltic Exchange Dry Index (BDI)
Secondly, the recovery in international freight traffic, after the 2020 hiatus, is occurring at a time of container shortages (liners have not replenished the containers that were emptied at the start of the pandemic) and less airfreight capacity (due to the reduction in long-haul flights), resulting in longer delivery times and price tensions: the Baltic Index, an indicator of the cost of maritime transport,21 has more than doubled so far this year. To this situation must be added the increase in energy prices, although in the latter case there is an important base effect: just a year ago oil prices plummeted.
As a result of all of the above, production costs are tending to rise and, as a result, price tensions are appearing, both in industrial terms (the IPRI rose by 3.4% in April compared to April 2019)22 and consumption (inflation stood at 2.7% in May, the highest since February 2017).
will be temporary and localised to a few activities.
In any case, we believe this is a temporary impact, concentrated in just some activities, which should therefore not affect the outlook too much. On the one hand, the shortage of some components will affect certain activities, such as the automotive industry and, to a lesser extent, computer products, chemicals and electrical equipment, whose production chains may slow down, but without damaging the recovery of industry and the economy as a whole. For their part, transport problems can cause occasional delays, which we are confident will be overcome in the coming months.
As for inflationary pressures, these will continue over the coming months but should tend to normalise in the second half of the year as the base effect of the aforementioned oil prices fades and supply gradually adjusts to demand: in the case of metals, whose production is more diversified, supply will adjust more quickly so prices will tend to moderate in the coming months; microchip prices may take somewhat longer to get back to normal.
The outlook for the manufacturing sector in 2021 is favourable. In the short term growth may be modest and below GDP as the economy’s recovery will be led by those activities that were hardest hit by the crisis, in particular trade and tourism. In the medium term, the sector’s performance will be determined above all by its ability to adapt to the challenges of sustainability and digitalisation. In this respect, the ambitious Recovery, Transformation and Resilience Plan (RTRP), endowed with the NGEU funds, represents an opportunity not only to stimulate the recovery of industry but also to transform the productive fabric, through its modernisation and digitalisation.