Long-term economic unrest from Brexit and Donald Trump’s election has not come to fruition, but some factors could cause concern.

As we prepare to enter the second half of 2019, the road ahead for United States manufacturers in general can best be described as a mixed bag. Predictions of long-lasting economic unrest as a result of the Brexit vote and Donald Trump’s election have not come to fruition. That being said, the path forward contains reason for optimism, as well as some factors that could cause concern.

One reason for relative optimism is that the U.S. economy continues to perform well. Although the last recession was nearly 10 years ago, leading to concerns that a recession might be just around the corner, the economic data as of this writing doesn’t seem to reflect this.

What could negatively impact pump manufacturers’ bottom line, however, are the overall economy-wide wage increases resulting from the current tight labor market. Companies in competitive industry segments with standardized products are likely be most impacted as they lack the pricing power to offset this increase in their cost structure, thereby leading to squeezed profit margins.

The reaction of the Fed to this increase in wage growth has been to continue to raise U.S. interest rates to try and slow down the economy and reduce inflationary pressures. Fed pronouncements from earlier in the year have indicated that there doesn’t seem to be much dissent regarding interest rate increases, at least over the near term. However, current inflation data doesn’t appear to indicate that inflation is becoming a major problem, and so an excessively aggressive program to increase rates doesn’t seem likely.

In addition to adding to the cost of credit, this move also has the effect of strengthening the U.S. dollar relative to other currencies, thereby making U.S. exports less competitive. In Europe, political changes within the European Union (EU) are causing uncertainty at several levels, which makes a strengthening of the euro (weakening of the dollar) over 2019 hard to imagine.

The one area where we feel that has been overly hyped is on the subjects of tariffs. The first reason is that some seem to have overestimated how much free trade actually exists. Yes, international trade barriers have been reduced over the last 50 years, but the world has not arrived at a free trade state as envisioned by academic trade models. Consequently, trade barriers, including increasing tariffs, should be viewed through the prism of an adjustment in trading conditions, rather than a fundamental paradigm shift from a free trade world to a tariff barrier world.

Secondly, the Trump Administration appears to be using tariffs as a negotiating tactic to modify existing trade deals, rather than an ideological commitment to tariffs for the sake of tariffs. To the extent that these tariffs are successful in modifying existing trade deals to the benefit of U.S. manufacturers, U.S. pump manufacturers may find themselves in a better position over the long term.

Thirdly, in an extreme case in which tariffs were raised so high so as to substantially impact trade between the U.S. and Europe, larger, more geographically diversified pump companies would have an advantage over their smaller rivals. Larger companies would likely have the capacity to either shift production to countries not impacted by the tariffs and export to Europe from there or to sell their products to a third-party middleman in a country not impacted by tariffs for resale into Europe.

In short, the impact of tariffs on an economy-wide basis, while likely negative, is unlikely to be catastrophic given that many trade barriers continue to exist with economies that continue to function adequately.

Finally, we don’t see that Brexit is going to have a large additional impact on U.S. pump manufacturers in 2019. The final Brexit deal is still under discussion. Whatever ultimately happens, there is likely to be a period as everyone adjusts to the new political-economic realities, and as a new U.S.-United Kingdom trade agreement is negotiated and put in place.

However, the currency impact of Brexit (the pound depreciates/the dollar appreciates) has largely already happened. Whatever ultimately happens with the final deal (as long as there is a final deal and Britain doesn’t leave with no deal), the currency movement related to it is likely to be relatively muted. If the ultimate deal appears to be not as bad for Britain as feared, the pound could even appreciate relative to the dollar leading to more competitive U.S. exports into the U.K.

Overall, the global economic environment is in the midst of a multiyear adjustment period as political changes in the West, driven by a sense in certain populations that they have been bypassed by globalization, are resulting in challenges to the political/economic assumptions that have governed policy-making over the last 30 to 40 years. Brexit was one such challenge. Trump’s election was another. Last fall’s election in which the Democrats took over the House of Representatives does not likely represent a reestablishment of the former status quo as regards to trade policy as Trump is still president and the Republicans still hold the Senate.

Furthermore, recent election results in several European countries indicating a loss of support for mainstream political parties (including the resignation of Angela Merkel of Germany as the leader of her political party) means that the international trade environment a few years from now will likely look different than it does today. U.S. pump manufacturers with significant international exposure would be wise to maintain strategic flexibility as the world moves through this rather unsettled time.

The regulatory environment for the pump industry in Europe continues to focus on energy efficiency and end-of-life disposal initiatives.

One item that is now being discussed is what is called “Circular Economy.” This concept looks at the overall life cycle of the product and, if regulations are put in place, will have a significant effect on pump manufacturers. Circular Economy requires consideration of a number of product design aspects, including:

  • energy efficiency
  • material efficiency (minimum use of materials in the product)
  • durability
  • upgradability
  • recyclability

The subject is complex and certainly will need a significant amount of time before any regulations can be implemented. A large factor in the complexity is that there are some conflicts among the above listed factors. For example, material efficiency and durability, as well as energy efficiency and upgradability can to some degree be mutually exclusive. At this point it looks like regulations are not likely to be put in place in the next three to five years, but it is important to be aware of possible effects.