Amid tariffs, war-driven energy shocks and a flood of Chinese exports, Western industry appears to be in its worst shape for years. Yet the data are increasingly pointing in the opposite direction, even in the beleaguered Old Continent.
On Thursday the Financial Times reported that Ineos, the British conglomerate controlled by Jim Ratcliffe, has made a €400 million bet on listed European chemical companies, despite sector output falling by around 20% since 2022. Then came German factory orders for June, up 6.5% from a year earlier, with even the auto sector posting 3.8% growth. It's confirmation of a broad upswing in the global industrial cycle - but the West will need governments and consumers to play a bigger role to preserve its manufacturing strengths.
Demand is being driven by defense and AI investment
Industrial output numbers have been hard to interpret, because blockages in the Strait of Hormuz have led firms to build backlogs and then release them as tensions flowed and ebbed. Nevertheless, the JPMorgan Global Manufacturing Purchasing Managers' Index has remained in expansion territory since August last year, with this week's data showing that new orders, output and inventories all increased last month, and that employment rose at the fastest pace in more than two years.
True, the trend disproportionately hinges on a military buildup that is boosting aerospace and defence businesses, and a massive craze by AI giants to invest in data centres, chip foundries, and related power and network infrastructure. Even in Europe, which has less tech exposure, semiconductor and electronics stocks' earnings per share is forecast to grow 60% this year, according to LSEG Datastream, with the likes of Schneider Electric already unveiling record first-half adjusted EBITDA. And the machinery sector, suffering from a prolonged downturn in sales to China, recently recorded its highest net number of firms upgrading 12-month earnings forecasts since 2007. Sweden's Atlas Copco, for instance, reported organic order growth of 59% in its Vacuum Technique division, on which chipmakers rely.
The recovery still looks fragile without stronger domestic demand
Even in the United States, it's advanced manufacturing that accounted for all the increase in output since 2022, with the rest remaining in a deep recession, according to Oxford Economics. If the cash burn proves unsustainable for hyperscalers, this industrial growth spurt could end swiftly. Meanwhile, small rebounds in European chemicals and autos after announcing massive layoffs and plant closures aren't surprising. Ineos and peers BASF and Dow's bumper second-quarter earnings were aided by the Iran war temporarily disrupting the supply chains of Asian challengers.
Nevertheless, earnings expectations are now improving across most industrial subsectors worldwide. The true vulnerability, as Germany's June factory numbers showed, is that export growth remains sclerotic, yet consumption isn't filling the gap in Europe - and may even be starting to waver in the U.S. For a more durable recovery, governments must pair trade defences against Beijing with measures to boost domestic demand. While the EU has revised procurement criteria for strategic industries, technology, military and energy-sovereignty projects could do more to support domestic suppliers. Many governments also don't fully align EV and home-renovation subsidies with industrial policy goals. The supply side alone can only go so far.
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