Supply disruptions pressure manufacturing margins in the US and Europe

Companies in Europe and the US could face a profit squeeze from Q4 2021 onwards as sustained supply-chain disruptions slow the manufacturing recovery. We find that the automotive, machinery, oil and gas and chemicals sectors are the biggest cause for concern, and Germany in particular is at risk of a shortage-induced industrial recession. In Europe, financials data and estimates from a panel of about 1,100 large corporates suggest that 31% of companies should see their sales recede in the second half of 2021 vs the first half (against 25% of US companies), with a higher proportion among the automotive suppliers, chemicals and metals sectors. Profits expressed as a percentage of turnover will start to suffer in Q4, with more than 50% of sectors in Europe posting a decrease in EBITDA margin of -2.5pp on average versus 70% of sectors in the US (-0.6pp on average).

Market expectations confirm that an earnings slowdown is in the making. As of today, market participants are consistently revising down their companies’ earnings estimates, signalling that an earnings slowdown is in the making and that the highly uncertain environment will, most probably, damage the permanent earnings safety net that has been preventing equity markets from consolidating in the upcoming quarters. In this context, we expect earnings aggregates to come in close to flat in Q3, with clear early indications of (i) balance sheet deterioration, be it in terms of sales, earnings and/or margins moving forward, especially from Q4 2021, and (ii) differentiation across sectors, to the detriment of the sectors most affected and vulnerable to the current environment such as consumer discretionary (12.5% of the equity market capitalization in the US and 17.8% in Europe) and industrials (respectively 8.2% and 17.4%) – noticing that the aggregate Eurozone equity market seems to be more vulnerable that the US due to its underlying sector allocation.

Three factors could tighten the squeeze in 2022 and unfold in a context where policy support measures (tax deferrals, partial unemployment schemes and direct subsidies) will be entirely phased out in most countries: semiconductor supply, energy prices and tensions in Chinese manufacturing and transport activities. We expect Q2 2022 to be a turning point for supply-chain disruptions.  In this scenario, the catch-up potential in sectors plagued by shortages could be significant, notably for those with higher pricing power. Across sectors, this would translate into a +5-10% increase in turnover and profits over the whole year, reflecting two opposite trends: 1) Sectors which outperformed during the Covid-19 crisis, including metals, pharmaceuticals, electronics and household equipment, will post softer growth after two excellent years. 2) Sectors which underperformed, including the wider automotive sector and transport equipment, will bounce back from their 2020-2021 lows as supply-chain tensions ease and demand for air transport picks up gradually, respectively. In equity markets, the earnings expectations deterioration is also perceived to affect 2022 and part of 2023, though long-term growth expectations (beyond three+ years) seem to be maintaining some resilience.



Jordi Basco Carrera
Allianz SE
Aurelien Duthoit
Allianz Trade