The Dutch industry is seeing a sharp decline in output as it struggles to clear stocks that were previously built up extra (stockpiling) to cope with supply disruptions. In 2023, machinery producers suffered the most from the downturn, followed by chemicals and producers of plastic products and base metals. Towards the year-end, excess stocks come back more in line with demand. In 2024, slightly improving exports will also give some relief. However, producers will be affected by increased interest rates. The chip machine industry, which is important for the Netherlands, will probably only reap the benefits of the recovery of the global chip industry after 2024. ING Research states this and more in its recently published Vooruitzicht Industrie.
- Industrial production in 2023 falls by six percent due to a drop in demand and high long-term inventories.
- There has been a small growth in exports.
- Chip demand recovers in 2024, but Dutch chip machine manufacturing will not reap benefits until after 2024.
Strong output contraction in 2023
Dutch industry has seen a sharp drop in output in 2023 (minus six percent). Producers are struggling to get rid of material and product stocks. Due to previous supply disruptions, these are now larger than usual. As sales have fallen across the board, run-off is taking a long time, and production is under severe pressure. This year, appliance and machinery manufacturers have joined the long-shrinking energy-intensive subsectors such as chemicals, base metals, and plastics.
A little export growth and stock building
With inventories returning more in line with reduced demand towards the year-end, production will grow slightly (+0.5 percent) in 2024. This happens because of the need to keep inventories level. In doing so, a slight pick-up in exports is expected to counterbalance declining domestic demand for investment goods. Also, inventory accumulation will provide some new growth in the global semiconductor industry. The chip machine industry, which is so important for the Netherlands, will only reap the benefits after 2024. In the longer term, chip demand is likely to pick up further. In the absence of economic shocks, the demand for chip machines will gradually increase.
Edse Dantuma, ING Industry Sector Economist: “Increased interest rates, following high energy prices and commodity inflation, are leaving their mark on the industry. With order books also becoming increasingly empty at capital goods manufacturers, growth in 2024 will mainly come from renewed inventory building. For a firmer recovery, the international economy will first have to strengthen.”
Lagging in Europe, but above-average growth on balance
While Dutch manufacturing was still a leader within the eurozone after the start of the pandemic, production has been sinking relatively fast over the past 18 months. Although industrial production is stagnating or contracting in almost all of Europe, nowhere on average did it go down as steeply as here. Dutch output in October was just below the level of just before the corona pandemic. This is comparable to the eurozone as a whole, but better than Germany, where output was eight percent below pre-corona levels. On balance, Dutch manufacturing stands out as a result of the earlier period of excess growth.
Dutch industry is more cyclical due to the relatively large semiconductor industry and chemistry
The boom period of our country’s relatively large semiconductor industry contributed to the strong growth of the manufacturing sector. As a result, the downturn in the chip market is now also affecting the Dutch industry above average. As is the contraction in the cyclical chemical industry. This industry accounts for twice the total manufacturing output in the Netherlands as in Germany. In contrast, the car industry’s production share is only a fifth of that in Germany. That is precisely the one industry that showed strong catch-up growth across Europe in 2023. That small automotive share has also contributed to the fact that production in upstream industries, such as the base metal and plastics industries, has fallen more sharply in the Netherlands than in Germany and the eurozone as a whole.
Cautious recovery in chip demand in 2024, but machinery industry not yet benefiting
International chip production appears to be cautiously moving upwards. Stock building could ensure the growth of the global semiconductor industry in 2024. Technical solutions for the energy transition and for artificial intelligence, in particular, will create extra demand for chips. Still, chip machine manufacturing, which is so important for the Netherlands, will not reap the benefits until later. Before machine demand picks up again, chip demand must improve substantially. As a result, chip machine makers continue to struggle with delayed orders.
Growth through inventory build-up possible again especially at the beginning of production chains
As in the other energy-intensive industries, contraction in the chemical industry is bottoming out. A pick-up in gas consumption to its highest level in over a year and a half, a reduction in excess sales inventories, and cautious improvement in order inflows point to this. Real recovery is still some way off, but we expect moderate growth at the beginning of production chains in 2024 due to renewed inventory build-up. Thus, the production of basic materials and, to a lesser extent, of semi-finished products may increase somewhat again.
Modest output growth in 2024 due to slight increase in exports and renewed stockpiling
All in all, we expect modest demand growth in 2024, culminating in slight growth in industrial production (+0.5 percent). A limited pick-up in exports is key to this, especially as domestic business investment is contracting for now. Some 70 percent of industrial sales go abroad. The international economic stagnation thus depresses industrial production firmly. Driven by lower inflation and higher wages, a slight growth in consumer spending could gradually trigger a turnaround. Manufacturing companies usually anticipate this in time by resuming their purchasing and inventory positions.
Stocks decline not over, but improvement beckons
Already since August 2022, a relatively large majority of producers rate their inventories of finished goods as too high. However, due to previous strong inventory build-up, supply disruptions, and a strong demand downturn, producers are having trouble getting rid of excess stocks. It is only since July 2023 that sales inventories are actually shrinking. If this trend continues, some inventory build-up and corresponding production growth may resume in 2024. This is expected to take a few more months. Before more can be produced, more raw materials and semi-finished products are needed. Yet, material procurement has been declining for 15 months, and a turnaround is not yet visible.
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