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Report from
Europe
COVID-19 puts Europe on a knife-edge
The COVID-19 situation in Europe is on a knife edge. The
numbers of new cases and deaths have stabilised and are
beginning to decline in the worst affected countries, which
include Italy, the UK and Spain. This has led to calls for
the lockdown measures, which have been in place now
throughout large parts of Europe for over six weeks, to be
eased as the detrimental effects on economic activity,
education, mental health and general well-being are
becoming increasingly obvious.
Against this, the authorities must balance the very real
possibility that easing of the lockdown measures too soon
could trigger a renewed rise in coronavirus cases.
The reality of these concerns was confirmed following the
German government’s decision to begin relaxing
restrictions on 20 April to allow small businesses to open.
Germany now faces the prospect of having to restore
stricter lockdown measures as its number and rate of
coronavirus infections have grown again.
Whatever decisions are taken now, the economic effects
look certain to be nothing short of catastrophic. The IMF
latest projection, issued on 14 April, is that world output
will decline 3.0% this year, down 6.1% in advanced
economies and 1% in emerging and developing
economies. IMF observe that "for the first time since the
Great Depression both advanced economies and emerging
market and developing economies are in recession".
IMF warn that this is a baseline scenario and that "the
pandemic may not recede in the second half of this year,
leading to longer durations of containment, worsening
financial conditions, and further breakdowns of global
supply chains".
Under these conditions, say the IMF, global GDP may fall
even further, possibly by an additional 3% in 2020 if the
pandemic is more protracted this year.
Western Europe has been the epicentre of the pandemic in
March and April and 2020 IMF projections reflect this
fact. The steepest declines in GDP this year are expected
in Italy (-9.1%) and Spain (-8.0%). Large declines are also
forecast in France (-7.2%), Germany (-7.0%) and the UK
(-6.5%). Total eurozone GDP is expected to fall 7.5% in
2020.
Prospects for global trade are equally grim. The WTO’s
trade forecast report for 2020 issued earlier in April
projects that total world trade will fall by between 13%
and 32% this year.
European timber importers put orders on hold
Accurate estimates of the specific effects on timber trade
volumes this year will only become apparent when more
countries publish trade data for the first quarter (data for
European trade during that period is due be published in
mid-May).
Anecdotally, reports suggest most European timber
importers were putting orders on hold in the second half of
March and during April as they struggled to deal with a
build-up of stock that couldn’t be shifted as manufacturers,
retailers and construction sites have gone into lockdown.
Shipper and forwarder groups in Europe have been calling
on carriers and terminals to exercise restraint before
issuing detention and demurrage charges for goods
ordered before the lockdown that were still on the water
and due to arrive in April and May.
Adding to the uncertainty, freight rates have become
volatile, rising sharply on some routes (e.g. from Europe
to China and East Asia) and falling on others (e.g. North
America to Europe).
Containers shipping cargoes from Asia to Europe, the US
and other countries have been severely reduced, with no
empty containers transporting timber back. Shipping
companies have cancelled hundreds of vessels in response
to the fall in demand.
According to a report by Bollore Logistics, European ports
are continuing to operate despite difficult conditions and
containers are being processed for onward movement,
although clearances by some customs authorities is slower
and there are border bottlenecks. Most shipping companies
continue to operate, although they are adding surcharges
and available space and equipment has become very
restricted.
Within Europe itself, the borders of the Schengen area and
between the European Union and the rest of the world are
partially or completely closed. However, the flow of goods
is free from these restrictions and continues to be
authorised to ensure supply chains can be maintained.
Land transport of goods is continuing in Europe, subject to
disruptions and slowdowns due to increased border
control, sanitary measures (such as health checks on
drivers) and special arrangements (including closure of
certain border posts and detours, limited driver
availability).
Steepest fall in European business activity ever
recorded
During this period of heightened uncertainty, there is
much focus on the IHS Markit Purchasing Managers Index
(PMI) for early insights into the impact of COVID-19 on
European market conditions.
The latest ‘flash’ PMI assessment for April (published
early based on approximately 85% of the final number of
replies received every month) suggests that the eurozone
economy suffered the steepest falls in business activity
and employment ever recorded during April as a result of
the COVID-19 lockdown measures.
The eurozone PMI index plummeted to an all-time low of
13.5 in April, down from a prior record low of 29.7 in
March, to indicate by far the largest monthly collapse in
output recorded in over two decades of survey data
collection (the PMI operates on a scale of 0 to 100 and any
score below 50 implies a contraction in output when
compared with the previous month).
By comparison, the lowest reading seen during the global
financial crisis was 36.2, reached in February 2009.
The service sector bore the brunt of the impact from the
lockdown measures, with the eurozone business activity
index sliding from 26.4 in March to just 11.7 in April.
Companies operating in sectors such as hospitality,
accommodation, restaurants, travel and tourism saw
especially steep falls in activity, with vast numbers of such
companies in enforced shutdowns or severely limited in
terms of their ability to operate.
Manufacturing also saw a record fall in production, the
PMI output index slumping from 38.5 in March to 18.4,
with many non-essential businesses having closed and
others reporting either dramatically reduced demand or
being constrained by shortages of staff and inputs.
By region, the unprecedented scale of the collapse was
broad-based, with composite flash PMI output indices
hitting all-time lows of 17.1 and 11.2 respectively in
Germany and France (down from 35.0 and 28.9 in March),
while the rest of the region saw the composite PMI slide
from 25.0 to 11.5.
Commenting on the flash PMI data, Chris Williamson,
Chief Business Economist at IHS Markit said: “April saw
unprecedented damage to the eurozone economy amid
virus lockdown measures coupled with slumping global
demand and shortages of both staff and inputs.
“The extent to which the PMI survey has shown business
to have collapsed across the eurozone greatly exceeds
anything ever seen before in over 20 years of data
collection. The ferocity of the slump has also surpassed
that thought imaginable by most economists, the headline
index falling far below consensus estimates.
“Our model which compares the PMI with GDP suggests
that the April survey is indicative of the eurozone
economy contracting at a quarterly rate of approximately
7.5%”, concluded Mr. Williamson.
PMI data for the UK is equally sobering. The IHS
Markit/CIPS Flash UK Composite Output Index was at
12.9 in April, down from 36.0 in March, indicating that
the combined decline in manufacturing and services was
considerably worse than the 38.1 experienced at the height
of the financial crisis in 2008/09. 81% of UK service
providers and 75% of manufacturing companies reported a
fall in business activity during April.
The UK services PMI fell to 12.3 in April from 34.5 in
March, the sharpest reduction in service sector activity
since the survey began in 1996. Customer-facing service
providers reported a complete shutdown of business
operations in April whilst many other respondents stated
that they had weaker demand due to closures from clients.
The UK manufacturing PMI was 32.9 in April, down from
47.8 in March, the lowest since the survey began in
January 1992.
Based on history, this would correlate to more than a 6%
contraction in GDP in the UK during the second quarter of
2020. IHS Markit noted that even this is probably too
optimistic since these PMI exclude some key sectors such
as retail.
Other projections for the UK economy this year are
certainly more pessimistic, despite the fact that most
forecasters still assume a ‘V’ shaped recession - a sharp
fall in activity during the first half of 2020 followed by a
swift recovery in the second half of the year.
On 16 April, HM Treasury published recent UK
macroeconomic forecasts across City and non-City
forecasters. The average fall in GDP during 2020 is
expected to be 7.4%, ranging from the most optimistic
estimate of only 3.6% fall to the most pessimistic estimate
of 12%.
ETTF and EOS: COVID-19 impact on European wood
market “severe and wide-ranging”
On 15 April, the European Timber Trade Federation
(ETTF) and the European Organization of the Sawmill
Industry (EOS) organised a joint conference call to take
stock of the effects of the COVID‐19 crisis in the timber
market and to gauge what the situation will be in the
coming months. Representatives from eleven European
countries contributed to the discussion.
Participants concluded that the impact of the COVID-19
outbreak on the timber sector is wide‐ranging and severe
and the legacy is likely to be long-lasting. However, there
are significant differences between European countries,
indicative both of variable spread of the virus and policy
responses.
The construction sector, a fundamental market for the
timber industry, has taken a hit in several countries,
notably Spain, Italy, the United Kingdom and France, and
this has impacted on timber suppliers and other business
elsewhere in Europe which have a high level of exposure
to this group of countries.
In other parts of Europe – including Scandinavia,
Germany, and the Netherlands - the local construction
sector has been less affected. However, a crunch period for
these countries might yet be on the cards in the third
quarter of 2020.
The impact has also varied between market sectors.
Sectors connected to logistics, such as pallets, are
performing comparatively better than sectors connected to
manufacturing, such as the furniture and joinery industries.
In response to struggling demand, European wood
processors have introduced double‐digit production
curtailments, with reductions in Scandinavia generally
being less than in Central Europe.
Participants in the conference call expected that the Do It
Yourself (DIY) sector will help to prop up the European
timber market during a period when people are confined to
their homes. Larger DIY stores are also one of the few
categories of retailer that have been permitted to remain
open during the lockdown and are therefore better placed
to support sawmills and trade.
For both EOS and ETTF members, overseas markets are
very important. Participants in the call stressed that China,
as both a critical client and producer, has been recovering
in the last few weeks, while sales to the United States are
dropping.
They noted also that the Indian market is completely
closed, while there are also considerable difficulties on
both the demand and supply side in some South‐East
Asian countries.
Looking forward, both organisations agreed that the length
and intensity of the crisis will be crucial as to the pattern
of recovery. If the lockdowns and other measures prove
successful in controlling COVID-19 in the coming
months, there is some hope for a return to an almost
business‐as‐usual situation. It was noted that the timber
sector was performing well in Europe in the first quarter of
2020. Such a “V‐shaped” outcome represents a best‐case
scenario.
However, if there is a prolonged contraction in the general
economy and the construction sector in the second half of
2020, it will take a heavy toll on the timber industry, even
in countries that so far have managed to weather the storm.
There are also likely to be very significant structural
changes, still largely unpredictable, in both the wider
economy and the timber sector as a result of the pandemic.
COVID-19 halts positive developments in European
wood flooring sector
A similar narrative unfolded when the Board of Directors
of the European Federation of the Parquet Industry (FEP)
discussed the first impacts of the Covid-19 crisis during a
conference call in April.
FEP concluded that “the European parquet markets
generally started the year well showing stable to slightly
positive trends in January and February. But March and
the arrival of the Covid-19 virus on the European territory
put an end to this positive move.”
Compared to the same period last year, FEP’s provisional
results for the three first months of 2020 indicate stable
parquet consumption in Scandinavia (except in Sweden
due a decline in new build activity), the Baltic States and
Germany – all countries where economic activity
continued for the time being.
In contrast, the South of Europe which is experiencing
tougher COVID-19 restriction measures was already
reporting very significant declines in wood flooring
consumption: “Although right now it is impossible to
predict when activities will restart and how consumption
will then evolve, it is obvious that this crisis will have
long-term and significant impacts on the European
economy and industry,” FEP explains.
Eastern European construction carries on for now
Growth in European construction is forecast to drop to -
1.4% in 2020, according to the latest report from industry
analysts at GlobalData. The report, which follows
decisions by many of Europe’s leading industrial nations
to extend lockdown measures, suggests that continuing
activity in Eastern Europe may offset a sharp decline in
Western Europe.
However, GlobalData also emphasise that this preliminary
forecast may prove to be optimistic.
Construction activity in Western Europe is forecast to
contract by more than 5%, with GlobalData applying the
caveat that things will almost certainly be worse if
containment measures are further extended.
GlobalData highlighted that the situation in Eastern
Europe is currently less severe, noting that the virus is yet
to take hold in some countries in the region. Moustafa Ali,
Economist at GlobalData, said, “While the impact of the
virus has so far been limited [in Eastern Europe], the
health situation is expected to deteriorate in the coming
months.
The major Eastern European construction markets are also
set for severe disruption in the first half of 2020.”
UK hardwood trade suffering from lack of finance and
poor margins in time of COVID-19
A report on the UK hardwood market in the Timber
Trades Journal (www.ttjonline.com) notes that the sector
was not in total lockdown in April, but activity was
radically reduced by the Covid-19 epidemic.
Most hardwood companies responding to the TTJ survey
said that they had taken advantage of the new government
grant scheme to furlough personnel. One leading
importer/distributor said they had ‘downsized’ in line with
demand. Others had shut their doors entirely, initially for
three weeks.
“Some customers are continuing to operate for the time
being, and we’re still getting orders,” they said. “Some
construction sites are still working and joinery companies
are staying open to supply them and there’s also DIY
demand, presumably with people staying at home in the
lockdown.
There were reports of some customers actually increasing
orders early to mid-March, seemingly as a hedge against
suppliers curtailing operations. But that came to a halt
after government announcements of restrictions on public
gathering and closure of restaurants, pubs and other
amenities.
Smaller companies are also reported to be
disproportionately affected by customers extending
payment terms during the crisis, citing cash flow reasons.
“It tends to be bigger buyers, so you have little choice but
to comply,” said one agent/importer. Another business
agreed. “Almost our sole focus currently is getting paid,”
they said. Some companies expressed concern about
congestion building at UK ports, with importers running
out of storage themselves unable to take incoming cargoes.
However, one importer/distributor, which said they were
continuing to take both containers and breakbulk from
ports, thought this was not a ‘significant risk to date’ and
that port operators might use nearby overspill storage
areas if it became a problem.
In terms of supply, most companies consulted said that
they were asking for orders not yet dispatched to be
pushed back a month to six weeks. Overseas suppliers
were generally reported to be accommodating.
Looking forward, UK hardwood businesses were not sugar
coating the pill. The next three months, and possibly
longer, are expected to be very difficult. “The profit we
made at the start of the year has already been wiped out,”
said one importer.
There was also an expectation that the pandemic would
result in permanent changes; accelerating the trend to
remote working, more online trade and less overseas travel
and face to face supplier contact.
Inevitably, it is feared, the current crisis will also lead to
job losses and some industry concentration. “This has not
been a very profitable business for a number of years and
companies have not built up a financial safety net, so there
will be casualties,” said one importer.
“Hopefully, when we emerge on the other side, the trade
as a whole will press for better margins. We’ve been
selling hardwood too cheaply for too long.”
Other news from the UK highlights the vulnerability of the
hardwood sector during the COVID-19 lockdown and its
aftermath. Most producers and traders are small
companies that sell into other sectors, such as high-end
joinery and furniture manufacturing, equally dependent on
smaller operators.
The problems for small and medium-sized contractors in
the UK were clearly highlighted in a Federation of Master
Builders (FMB) survey published on 17 April. Almost two
thirds (65%) of small building companies stated that they
would not be able to last more than two months without
grants from the government while almost a quarter (24%)
said they would struggle even to get through four weeks.
The UK government had announced over four weeks
before the FMB survey that new loans would be available
under the Coronavirus Business Interruption Loan Scheme
(CBILS). However, only 4% of builders who had applied
for the CBILS had been successful.
The FMB survey also highlighted that 68% of builders had
stopped at least 91% of operations and new enquiries had
dropped by 64%. Of stopped work, 80% said this was due
to lack of availability of products and materials while 65%
experienced problems maintaining social distancing rules
on often small, domestic sites. Unlike other European
government, the UK government has so far resisted calls
to loosen the country’s lockdown.
After returning to work on 27 April following his
recovery, Prime Minister Johnson - the first world leader
to fall victim to coronavirus - urged caution and gave no
clue as to how or when businesses might return to normal,
calling this the time of "maximum risk" of a second wave
of infections.
Following his statement, and under pressure to set out a
timetable for easing of lockdown measures, the UK
government stated that this will happen only when five
tests had been passed: the number of coronavirus deaths
are clearly falling; the NHS is able to cope; the rate of
infection is coming down; there are enough supplies of
personal protective equipment (PPE) and COVID-19 tests;
and the government must be confident lifting lockdown
measures won't result in a second peak.
Sharp fall in German construction despite policy to
continue building
In Germany, Chancellor Angela Merkel has maintained
that construction should continue, calling it an “essential
pillar of the domestic economy, which must be
maintained”. With the IMF predicting that the Germany
economy could contract by 7% this year, the country is
looking to construction to help ease it out of recession in
2021.
DIY shops have remained open in most parts of Germany
during the lockdown, while many building contractors and
installers have kept working, with restrictions. Smaller
shops were allowed to open from 27 April, although this
move may be reconsidered with a subsequent rise in
coronavirus cases.
Despite the political focus on keeping the construction
sector operational, IHS Markit data shows that Germany's
construction activity decreased at the sharpest rate in
seven years in March with declines in all sub-groups as
firms cut jobs amid weaker demand due to the coronavirus
outbreak.
The German Construction PMI fell to 42 in March from a
25-month high of 55.8 in February. The construction
sector shrunk for the first time in seven months. Housing
activity logged its worst decline since March 2013, while
commercial activity fell the most in over eight years.
Signs are that the economy slowed even more dramatically
in April. Germany’s Flash PMI Composite Output Index
was at 17.1 in April, down from 35 in March, a record
low. The services PMI activity index was at 15.9 (Mar:
31.7), while the manufacturing PMI was only a little better
at 19.4 (Mar: 41.0). Firms’ expectations towards activity
over the next 12 months remained deep in negative
territory in April.
France ponders possible easing of lockdown from 11
May
French President Emmanuel Macron announced on 13
April a possible exit from COVID-19 confinement on 11
May, subject to strict compliance with gradual social
distancing measures. Until that time, economic activity in
France must remain at a low level. This has already put
more than 8 million workers in partial activity and resulted
in a 6% decline in GDP in the first quarter of 2020.
Most industrial activity in France has been at a standstill
since 17 March. Industrial joinery, carpentry, furniture and
panel factories have stopped producing almost 90% of
their production. The building and public works sector is
also at a standstill, with only maintenance and repair
activities continuing.
The IHS Markit ‘flash’ PMI for April posted a reading of
just 11.2, eclipsing March’s historic result of 28.9 and a
fresh series low. The overall reduction in activity was
driven by both manufacturers and service providers, with
the latter registering the sharper decline. Both sub-sectors
recorded their fastest contractions in output since
composite data collection began 22 years ago.
Amid widespread expectations of a global economic
recession, French firms surveyed by HIS Markit in April
were pessimistic towards the 12-month business outlook.
The degree of negativity was the most severe since
composite data were first available in July 2012. Both
manufacturers and service providers recorded record lows
for sentiment, with goods producers the more pessimistic.
According to IHS Markit, there are two key areas of focus
going forward: “firstly, how quickly will measures be
lifted as the gradual easing of restrictions begins on the
11th of May? This will give the clearest indication on how
fast we can expect activity to recover in the short-term.
Secondly, will the easing of restrictions lead to a second
outbreak of the virus? If so, any remaining hopes of a socalled
‘V-shaped’ recovery will vanish.”
Some insight into hardwood product consumption is
provided by FEP, the parquet wood flooring association
who note that, compared to the first three months of 2019,
French parquet consumption fell by 15 to 17% during the
first quarter 2020. FEP note that “January and February
were normal months of activity, but the French parquet
market collapsed in March. All shops are closed. All
factories have stopped their activities”.
Economic activity still tightly constrained in Italy
Italy was the first European country to experience a
significant outbreak of COVID-19 and was the global
epicentre in February. Northern Italy, where most of the
country's factories are based, has been the worst affected
region. The country's vital design sector was brought to a
standstill, with Milan's Salone del Mobile postponed and
later cancelled.
Only a limited amount of economic activity has continued.
Shipping lines are operating despite difficult conditions
and cargo can be moved, although challenged by limited
container availability, blank sailing in imports, and
surcharges.
On 10 April, Prime Minister Giuseppe Conte extended
Italy’s full lockdown to at least 3 May. There were some
government concessions allowing timber companies and
other strategically important activities to continue, but
factories were to remain closed for the time being.
This decision came despite pressure from the Italian
furniture sector that has been calling for operations to be
allowed to restart as soon as possible. In the first week of
April, representatives from nine Italian furniture firms—
B&B Italia, Bisazza, Boffi, Cappellini, Cassina, Flexform,
Giorgetti, Molteni Group, and Poltrona Frau—issued a
manifesto asking that their factories be allowed to reopen.
While emphasising that ‘health comes first’, the Italian
firms stressed their concerns about a mounting backlog of
orders and competition from other countries with fewer
current restrictions on production. They believe this could
end up causing long-term devastation to Italy’s furniture
industry.
If factories remain closed for much longer, the manifesto
warns, “we could lose 20–30% of our industrial heritage
and witness serious damage to the industry. All of this
would inevitably result in the loss of tens of thousands of
jobs.” In conclusion, the group asserts that “it could take
20–30 years to recover what we would lose in a few
weeks.”
The petitioning firms highlighted several structural
characteristics of furniture production and sales that could
make it possible to get back to work while maintaining
social distancing. Beyond more typical measures, like the
use of certified personal protective equipment, temperature
scanning, and regular deep cleanings, the companies note
that “our plants are safe spaces, thanks to the layout of the
production areas that respects social distancing.”
Additionally, the location of their factories allows
employees to reach work without relying on public
transportation.
More recently, the Italian government has been signalling
its intention to ease the lockdown. In an interview
published on 26 April, Prime Minister Conte told Italian
daily La Repubblica “we are working in these hours to
allow the reopening of a good part of businesses from
manufacturing to construction for May 4”.
Mr Conte said that some companies considered
“strategic”, including export-oriented businesses, could
reopen in the last week of April if local prefects give them
the green light. Perhaps partly to acknowledge the
furniture industry manifesto, Mr Conte added that
exporting businesses need to reopen sooner to avoid the
risk of being cut out of the production chain and losing
business.
On 16 April, the Italian construction forecasting body
CRESME said that construction activity this year could
fall by almost 23%, which is more than double the decline
in 2009, the worst year of the financial crisis. That
represents a loss of �34 billion in investment in
construction for Italy this year. According to FEP, the
Italian parquet market declined by 10% during the three
first months of the year.
Spain plans to end lockdown measures by the end of
June
Despite having more confirmed COVID-19 cases than any
other European country, Spain began to ease some
lockdown measures from 13 April, allowing workers in
manufacturing, construction and some services to return to
work.
On 28 April, the Prime Minister Sanchez outlined a fuller
de-escalation plan with four phases, each expected to last
about two weeks. He said the process would take a
minimum of six weeks, and hopefully no more than eight."
By the end of June, we as a country will have entered into
the new normality if the epidemic remains under control,"
he said.
Before the plan kicks in, there will be a preparatory "phase
zero" from 4-11 May, in which businesses that take
appointments can reopen, restaurants can offer take-away
services, and professional sports leagues will go back to
training.
Mr Sanchez said provinces would progress to less
restrictive phases based on their infection rates, local
hospital capacity, and how well distancing measures were
being observed.
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