Claims of deindustrialisation in Europe are overblown

The second wrong way to think about deindustrialisation is as a descriptor of Europe’s shrinking share and falling importance for global industrial output. This is undoubtedly real: we expect that eurozone industry will go from 12.2% of the global total in 2023 to just over 10% by 2050. However, this trend is more attributed to rapid economic growth in Asia, particularly China, rather than competitiveness issues in Europe.

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So, what is the better way to define deindustrialisation? Our view is that the best measure of industrialisation in an economy is the share of GDP that such activities make up, particularly in larger and more complex economies. As such, deindustrialisation can be best understood as a drop in industrial output relative to the economy as a whole.

Using this definition, we can see that the industrial share of GDP moved very little in 2022/2023 relative to the past. Take Germany: manufacturing as a share of GDP has fallen to 22.2% as of Q1, which is only 0.26ppts lower than in Q1 2022 prior to the industrial recession. This is much less than in the last period of notable deindustrialisation, where the manufacturing share of economic output fell from 24.8% at the beginning of 1991 to 21.9% two years later—a fall of 2.9ppts that would be compounded by a further fall of 1.5ppts in the subsequent years. The mild decline we’ve seen in this latest industrial recession suggests that current industrial troubles should be seen within the context of a broadly weak economy, not necessarily an industry-specific problem.

The future of European industry

We do agree that European industry as a whole and specific industries are undergoing transformation; the difference is that we don’t think this will translate into deindustrialisation. Some industries will decline, but this will be offset by the rise of others.

Looking into the future, we believe Europe’s strengths lie in highly complex, specialised areas of manufacturing. These areas not only require a highly educated workforce, but also benefit from network effects, institutional knowledge, and the cumulative impact of decades of investment in intellectual property, patents and physical capital. There are also barriers to entry in terms of research costs and building up trust and reliability among potential customers.

While global competition in these areas exist, we see little sign that the European advantage is on the cusp of being overturned. Ironically, Europe’s struggles with an ageing workforce and labour shortages may prove to be an advantage, in the way that they incentivise a virtuous cycle of automation and the adoption of cutting-edge labour-saving technologies. Germany is, for example, currently a world leader in factory automation.

Industries at risk

While some sectors will still see opportunities, not all parts of European industry will thrive. There are in fact a number of sectors that we believe are poised for decline—in some cases terminal—over the next decades.

There are some commonalities shared across these declining sectors. They are, as a general rule, lower value-added, often produce goods that can be easily transported and traded, need low-skilled labour, and are often energy-intensive or otherwise reliant on fossil fuels.

The sectors facing most significant threats are:

Textiles & clothing
Forecast: decline. We see this sector falling from around 0.4% of GDP to just 0.1% by 2050.
Textiles production has been declining as a share of GDP and in absolute levels in Europe since the early 1990s. This labour-intensive industry has been decimated by the rise of fast fashion and the emergence of low-cost competitors, particularly in Asia. What remains in Europe tends to be more bespoke, higher-quality, and costly, which is a smaller market.

Pulp & paper
Forecast: decline. We see this sector falling from around 0.4% of GDP to 0.2% by 2050.
Pulp & paper has, in Europe and globally, been growing in line with broader industry recently, but we see a twofold challenge ahead. First, global demand is expected to plateau as the world becomes more digital. Second, Europe will capture a smaller share of this stagnating market. The sector’s energy-intensive production will face mounting pressures from rising energy costs and growing sustainability concerns. Policies like the carbon border adjustment tax can only partially mitigate these issues.

Refining
Forecast: decline. We see this sector falling from around 0.4% of GDP to 0.3% by 2050.

Rubber & plastics, basic metals
Forecast: stagnation. We see this sector falling from around 0.8% of GDP to 0.7% by 2050.
Both sectors face a similar challenge with sustainability and reliance on fossil fuels on a continent that is increasingly pushing in the opposite direction.

Chemicals
Forecast: slight growth. We see this sector falling from around 1.2% of GDP to 1.1% by 2050.
Chemicals faces a mix of competitive and environmental pressures. Much of this production is expected to continue for decades and, in some cases, be retrofitted for more eco-friendly production processes. However, these efforts primarily aim to protect existing production capacity and production levels, rather than setting the stage for new investment and growth.

The analysis forecasts in this blog are backed by our Global Industry Service, which provides forecasts and insights for over 100 sectors in 77 countries. To unlock the power of these industry insights for your business, request a free trial by clicking here.