Select Page

Weak manufacturing data often gets the attention of financial commentators we follow, as they regularly portray industrial weakness as a sign of broader economic trouble. In some cases, we agree – worse-than-expected factory data can reflect poor conditions overall. But in our view, this isn’t a given, as conditions in the vast service sector may differ. In Fisher Investments UK’s view, investors benefit from scaling manufacturing and services’ respective influence on economic output, as doing so can provide perspective when analysing economic data.

It seems to us manufacturing receives this attention partly because of its historical importance in Europe. For example, consider Germany’s legacy as an industrial powerhouse. Germany’s mid-19th century industrial revolution saw factories sprout up across the country, as railway construction, metal processing and mining bolstered German manufacturing for over a century.[i] Yet this reputation seems to live on to the present based on Fisher Investments UK’s review of financial publications, as Germany is still well known for its automobile and chemicals production industries. The UK and France also have robust manufacturing heritage, as both countries had bustling post-World War II (WWII) factory scenes. Fisher Investments UK’s reviews of history suggest manufacturing was essential to several European countries’ building up their militaries, so governments were interested in tracking production capacity and productivity. Thus, manufacturing’s legacy as the backbone of Europe’s economy is probably why many watch industrial production gauges so closely, in our view.

Industrial production is also relatively easy to measure, as factories can tally output volumes in distinct, physical units. In comparison, services output is often intangible. For example, it might be difficult to quantify production from someone like a mathematics professor, nurse or software product manager – statistics agencies are still finding ways to record services data.[ii] In Fisher Investments UK’s view, this is another reason services data don’t receive the same broad coverage.

But based on the numbers, services comprise much more of Europe’s economic output today. Whilst manufacturing volumes – e.g., the total number of vehicles produced or factory orders placed – in the world’s biggest developed economies have largely risen alongside gross domestic product (GDP, a government-produced measure of output) since WWII, their share of economic output has fallen at the same time.[iii] Take the UK. In 1960, manufacturing’s share of UK GDP peaked at 36%.[iv] Yet as of 2021 (the latest available data), that figure was just 9%.[v] In France, manufacturing also represented around 9% of 2021 GDP, down from about 23% in 1960.[vi] The same rings true in Germany. At reunification in 1991, manufacturing made up 25% of GDP. In 2021, it was 19%. [vii]

This isn’t just a European phenomenon. For instance, in the United States – also known for its post WWII manufacturing prowess – factory production peaked at 28% of GDP in 1953.[viii] As of 2021, it comprised only about 11%.[ix] Japan’s manufacturing share of output fell from around 37% in 1970 to 20% in 2020.[x] Fisher Investments UK’s reviews of economic history suggest the widespread shift to services likely stems from the mid-20th century’s major technological advances. Based on Fisher Investments UK’s research, as manufacturing became more automated, jobs moved out of the factory and into industries like retail, technology, medicine, education, finance and other non-manufacturing sectors. Now, services industries dominate several of Europe’s largest economies. To name a few, the UK is a global hub for financial services, France and Germany are medical technology innovation leaders and Italy and Spain have bustling tourism industries.

For these reasons, Fisher Investments UK thinks investors benefit by recognising manufacturing doesn’t singlehandedly determine the overall economy’s direction. Therefore, manufacturing and industrial data provide a limited window into economic trends, in our view. By realising this, we think investors gain an upper hand in understanding how broader economic conditions are faring – especially when financial news may suggest otherwise. In Fisher Investments UK’s view, having an accurate grasp on economic reality is key when making portfolio decisions. For example, some financial commentators we follow have cited weak manufacturing purchasing managers’ indexes (PMIs), which have shown contraction from mid-2022 through May 2023, as evidence of a eurozone recession.[xi] Though eurozone GDP did contract in Q4 2021 and Q1 2022 – meeting a popular definition of recession – we think it is inaccurate to consider the whole monetary bloc in an economic downturn given 16 of 20 eurozone countries grew in the last two quarters.[xii] A big contributor to that growth, based on our analysis: resilient services expansion.

Fisher Investments UK doesn’t discount manufacturing or its role in the global economy. But in our view, services trends tell investors more about economic conditions in developed economies. So when you consider economic data as a part of future investment decisions, remember manufacturing’s limited role in Europe and worldwide. Economies’ main driver is services – and it likely will be for the foreseeable future.

Get exclusive stock market knowledge in your Markets Commentary guide as the first of our ongoing insights.

Follow the latest market news and updates from Fisher Investments UK:

This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

[i] “From Old Regime to Industrial State: A History of German Industrialization From the Eighteenth Century to World War I,” Richard H. Tilly, Michael Kopsidis and Simone A. Wegge. Accessed via Economic History Association Book Review, September, 2022.

[ii] “How Government Statistics Adjust for Potential Biases from Quality Change and New Goods in an Age of Digital Technologies: A View from the Trenches,” Erica L. Groshen, Brian C. Moyer, Ana M. Aizcorbe, Ralph Bradley and David M. Friedman, Journal of Economic Perspectives, Spring 2017. Accessed via Google Books.

[iii] Source: Destatis, the Office for National Statistics and US Bureau of Economic Analysis, as of 24/5/2023. Germany, UK and US manufacturing gross value added and GDP, 1970 – 2021. GDP is gross domestic product, a government-produced measure of economic output.

[iv] Source: World Bank, as of 24/5/2023. UK manufacturing value added percent of GDP, 1960.

[v] Source: World Bank, as of 24/5/2023. UK manufacturing value added percent of GDP, 2021.

[vi] Source: World Bank, as of 24/5/2023. France manufacturing value added percent of GDP, 1960.

[vii] Source: World Bank, as of 24/5/2023. Germany manufacturing gross value added percent of GDP, 1991 – 2021.

[viii] Source: US Bureau of Economic Analysis, as of 24/5/2023. US manufacturing gross value added and GDP, 1947 – 2021.

[ix] Ibid.

[x] Source: Japan Ministry of Land, Infrastructure, Transport and Tourism and World Bank, as of 24/5/2023. Japan manufacturing value added percent of GDP, 1970 – 2020.

[xi] Source: FactSet, as of 13/6/2023. S&P Global eurozone manufacturing PMI, July 2022 – May 2023. PMIs are monthly business surveys, in which readings above 50 imply a majority of respondents saw expansion whilst below 50 point to contraction.

[xii] Source: Eurostat, as of 9/6/2023.