Sector News
The European Economy – running into deflationary headwinds?

Recent economic data from Europe has been very mixed, but the overall mood has darkened in the past few weeks. Even the UK, the star performer within the major European countries, has been hit with figures suggesting a slowdown in manufacturing production. The rate of that was nothing however compared to the 4 percent plunge in industrial output in Germany between July and August, suggesting a big drop in demand caused by slowing growth in China, problems in the Middle East and eastern Europe.

And whilst economic growth looks strong in the UK, the victory of the nationalist UKIP party last week, winning a parliamentary seat for the first time in an English by-election, shows a level of dis-satisfaction amongst many citizens. (Perhaps in part because GDP per head is not growing much at all given the high levels of immigration to the UK).

Whilst the countries which struggled most in the 2008/9 crash (e.g. Ireland, Portugal, Greece) have continued their painful and slow recovery, the continental giants of Germany, France and Italy have some real problems. The German situation is perhaps the most immediately worrying, as the largest engine of European growth and prosperity. The output figures mentioned above suggest the economy may even be back into recession.

The issues have a number of causes, which vary somewhat country by country. The sanctions on Russia, following the Ukraine crisis, are hitting Germany particularly hard as a major trading partner. In France and Italy, there are deep seated structural issues, including the inflexible labour markets and difficulties for entrepreneurs who want to start new business. Hollande’s government in France is back-tracking on many of the anti-business measures they first introduced, but they have some way to go before they are seen as truly business friendly.

And after years of worrying about inflation, the enemy now is perceived to be deflation. The yield on German Bunds has fallen to an all-time low, with the expectation that the European Central bank will soon have to launch “quantitative easing” – basically, pumping money into the economy to stimulate growth (and a bit of inflation).

So what does this all mean to public sector procurement people? There are three key points for any professional to consider:

1. We would suggest that every procurement professional should have a reasonable level of general business and economic knowledge. As a function that faces the outside world of suppliers, we need to have good general awareness and visibility of what is going on in that wider world. That includes being well informed on general economic issues.

2. Procurement must be sensitive to the issues facing key suppliers to our organisations. If economies are indeed going into reverse, we need to watch out for individual suppliers who may have problems – which could rebound on our organisations. We would suggest stepping up monitoring of critical suppliers through the various routes available to achieve that.

3. There are increasingly strong calls for more public investment in Europe to offset the deflationary environment and to stimulate spending and growth. Therefore, we may see a growth in large capital projects coming through in the next year or two. But that raises the question – do governments have the skilled procurement and project management resource available to handle these likely large and complex procurements?

Indeed, it is difficult to predict whether public sector spending is likely to fall over the next few years given the tough economic times, or increase again if money is pumped in to stimulate growth. We will have to wait and see.