Over the last few years, inflation and interest rates have dominated the conversation where economic matters have been discussed. The unprecedented liquidity injection to keep economies running and households afloat during the COVID pandemic has been extremely destabilizing, as central banks have pushed up interest rates in an effort to slow down the economy and reduce inflation. Overall, there has been some success in bringing inflation down, and much of the talk in the financial markets has been regarding when interest rates are going to start to come down, as some are worried that high rates for too long could prompt a recession in the United States and globally.
What many seem to forget is that the interest rates that we are seeing now in the U.S. are only extremely high when looked at in the context of the last 15 years. After the financial crisis of 2008, the Federal Reserve (Fed) kept rates fluctuating in an historically low range. Rates today are not that dissimilar from where they were when one of the authors started his banking career nearly 20 years ago, a time at which rates were not viewed as “low,” but also not excessively “high”. While many six months ago had looked for the Fed to reduce rates several times over 2024, some understood that rate cuts would only come when there is a clear sign that the U.S. is moving into a recession—something that is not the case right now. Rate cuts are a policy tool to try and stimulate a slowing economy, not to take a growing economy from 2% growth to 3% growth. In addition, 2024 is a presidential election year in the U.S., and the Fed is likely to have a higher hurdle than normal to take action, lest it be seen as trying to help one political party over another. In other words, it is likely to need a clear, unmistakable sign that either the U.S. is slipping into recession or inflation is heating up again if it is to make an interest rate move before the election.
However, one factor that we may be starting to see is a divergence in policies, especially in the western world. In the recent past, the European Central Bank, the Fed and the Bank of England have shifted interest rates more or less in tandem. However, the European Central Bank recently cut interest rates by a quarter point—the first rate cut in five years. They stated that they did it due to inflation pressures easing but warned that further cuts were dependent upon inflation easing further. In contrast, the U.S. isn’t expected to enact a rate cut until late in the year, if even then. From the point of view of international trade to Europe (including the pump industry), we can expect the euro and other European currencies (which are often tied to the euro) to weaken against the U.S. dollar. For American pump companies that source parts from Europe, this will likely mean lower prices for imported parts and ease pricing pressures in competitive industries. For those companies that are exporting parts to Europe, this shift will make their products more expensive relative to local competitors.
Another potential challenge on the horizon for internationally active pump companies is the fact that the western-led system known as globalization that has been dominant over the last 70+ years is clearly fraying as the push towards free trade is now starting to reverse. There is no clearer sign of this than that two very ideologically different U.S. administrations in the Trump administration and the Biden administration decided to impose (Trump) and keep (Biden) tariffs on Chinese products—a break with prior administrations. As the globalized system modifies into more regional trading block systems and as the world political system shifts into a more multipolar state, the challenges for international businesses seeking to navigate this new reality will be different than in the past. What these new challenges will be is not entirely clear and will likely be different from trading block to trading block. But a world in which governments look to trade policy in more of a mercantilist manner—to increase their national power and prestige as opposed to managing a globalized trading system—will look different from the past. For U.S. manufacturers, this change will be even starker than for some other countries, as the U.S. has used trade policy to manage a globalized trading system, sometimes to the detriment of its own industries. A U.S. shift here will cause other countries to shift their policies relative to the U.S.—something that will change the game for many U.S. firms currently operating in various countries. U.S. manufacturers that do business internationally will likely need to be more flexible and need more country-specific experts on staff than what has been the case in the past.
As for the pump industry, in the shorter term specifically, the decline in overall inflation as a result of rate increases has caused growth in pump prices in various countries to decline into the low single digits, after spiking to double digits in 2021 and 2022. This is not necessarily a bad thing as it is an indication that the pump market (along with most other markets) is stabilizing and returning to its more long-term path.
The view from the European pump industry perspective, however, was recently laid out by Oxford Economics at the most recent Europump meeting in May, which one of the authors attended. Oxford Economics is contracted each year by Europump to prepare a report containing a yearly economic and pump market forecast.
Overall, Oxford expects global GDP to grow by 2.6% on average between 2024 and 2028. However, they see several potential risks such as China-Taiwan tensions, Middle East escalation, higher long term interest rates and escalation in the Ukraine conflict. They did note that inventories are coming down to acceptable levels as supply chain pressures have started to ease. Also, energy prices are coming back to pre-pandemic levels, with inflation generally easing—a fact that prompted the aforementioned interest rate cut from the European Central Bank.
As for the pump market specifically, Oxford sees that prices are dropping towards long-term average values. They also expect the Worldwide Pump Market to grow roughly 4% per year on average between 2024 and 2028.
Of note is that significant importance was placed on the question of what a Trump victory in U.S. November election would mean for European pump manufacturers ability to export into the U.S. market. The effects that Oxford forecasts of this scenario appear to be somewhat mixed as there would likely be a scale back of climate change provision projects which would reduce pump demand. However, a more positive move towards oil and gas which would have the effect increasing pump demand, as would the economic expansive effects of anticipated corporate tax cuts that a Trump Administration might enact. There is also some question as to whether Trump would strengthen the Build America, Buy America Act (BABA), which would disadvantage European pump exporters in the American market, or kill the Act, as it was an act of his predecessor, which might allow easier importation of pumps into the U.S. from Europe.
In general, with the pluses and minuses involved, there does not seem to be a significant level of concern (or optimism) in the European pump industry if there is a change of U.S. administrations as a result of the November elections.
In conclusion, the short-term outlook is that U.S. pump manufactures that do business in Europe are likely to face a currency headwind, at least until such time as the Fed starts to cut interest rates. Meanwhile, the European pump industry appears rather stoic regarding the potential outcome of the U.S. election, seeing the possibility of positive and negative results emerging from policies implemented by whoever wins. In the longer term, U.S. pump manufacturers should be mindful that the world is going through an epochal geopolitical shift and that lessons absorbed from the last 20 or 30 years need to be reevaluated as they pertain to doing business internationally. While being a flexible organization has always been an advantage, going forward it will be critical if one is to do business overseas.