What energy crisis? European industry is showing its adaptability

The nice economist Robert Solow famously quipped that he may see the IT revolution in all places besides within the productiveness statistics. Right now I can see Europe’s power disaster in all places besides within the industrial output numbers.

After a yr of very excessive power costs — in addition to costly fuel for these industries utilizing it within the manufacturing course of (as feedstock) — wouldn’t you anticipate business to undergo? Particularly since we all know that Europe has managed to chop at the very least fuel consumption quite significantly in response to Russian president Vladimir Putin’s weaponisation of fuel. And twice-especially as a result of we now have heard a lot of complaints about how European manufacturing is changing into uncompetitive and that America will lure the continent’s industrial base away.

However check out the quantity of producing industrial production within the EU and the eurozone within the chart under. When you can spot how Putin has crushed European business (not for lack of attempting), do let me know. The EU as a complete has by no means produced higher volumes of manufactured items than right this moment. The identical is true for the eurozone, though its volumes have twice earlier than reached related magnitudes however solely briefly (in late 2017 and the spring of 2008).

When you have a look at particular international locations, the numbers soar up and down fairly a bit from month to month, so you may little doubt discover what appears like just a few months’ value of a downward pattern in some international locations. However just about all EU international locations elevated their industrial output from September 2021 to September 2022 (the final full numbers), typically by giant quantities. If they’ve struggled with the extraordinary power costs this yr, it’s a really relative battle certainly.

These are very tough numbers, and provides no granular insights into how Europe’s factories have tailored. However there are a lot of country-level research that go extra totally into the manufacturing sector. They usually largely affirm the large image that business is extra sturdy than it might appear.

Essentially the most concerned work I’ve seen is on Germany. Final week the Ifo Institute revealed a survey displaying that out of the 59 per cent of commercial corporations utilizing fuel within the manufacturing course of, an astonishing 75 per cent reported that they’d been in a position to scale back fuel use with out having to chop manufacturing. (I’ve reproduced a chart from the research under which exhibits the distribution of responses.) Practically 40 per cent reported they’d room for manoeuvre to eat even much less fuel with out manufacturing struggling. Since fuel not utilized in manufacturing is fuel that can be utilized to generate energy, this quantities to a excessive diploma of adaptability to excessive power costs.

Admittedly, a small minority of corporations have warned that they could must not simply curtail however cease manufacturing altogether in the event that they needed to scale back fuel use. And there are examples of factories shutting down — for gas-hungry ammonia, for instance. However the huge image is way more buoyant than one might need thought.

Extra detailed insights alongside the identical traces come from an econometric study of gas consumption by all financial sectors (small customers, industrial customers and energy stations) from the Leibniz Data Centre for Economics. The authors filter out extraneous results on fuel use such because the climate, and discover that in response to greater costs for the reason that autumn of 2021, industrial and small customers have decreased consumption by vital quantities (as much as 19 and 36 per cent respectively).

And Ben McWilliams, of the Bruegel think-tank, has posted numbers on Twitter displaying that whereas Italy’s business had lately used 24 per cent much less fuel than the 2019-21 common, its industrial output had held up utterly. He makes a similar observation about German business.

What’s the upshot? That Europe has fought the financial warfare higher than it provides itself credit score for. For a warfare is what it’s; whereas Putin is attempting to starve and freeze the folks of Ukraine into submission, he’s additionally attacking Europe economically to encourage it to betray the Ukrainians preventing for his or her lifestyle. However very like Russia’s failures on the battlefield, its financial firepower just isn’t as devastating as many suppose. Liberal democratic capitalist economies are remarkably adaptable — not with out effort, however as a result of they’ve the financial and political assets, and the wherewithal to deploy them, to soak up shocks with resolve.

Industrialists themselves appear to have realised that the blow wasn’t as onerous as they’d thought. Enterprise leaders look like breathing more easily than simply weeks and months in the past. So, maybe, ought to we — however solely a bit, for if issues are going higher than feared, a bit complacency is all it takes to kill it.

Different readables

Numbers information

• Has eurozone inflation peaked?

• Centre for Financial Efficiency research estimates the prices of the brand new non-tariff obstacles to commerce (new cross-border regulatory necessities) that Brexit brought about on the UK’s commerce with the remainder of Europe. The impression on meals payments alone quantities to £210 per family on common.

• Global wages fell practically 1 per cent yr on yr within the first half of 2022, and the labour share of world earnings dropped in addition to wages didn’t sustain with productiveness development on the world stage.