State of the industry
Economist Chris Angle and pump industry expert Tom Angle weigh in with a global perspective on challenges and predictions for 2023.

The year 2022 seems like one of those years that becomes remembered decades later for having been a historical turning point. Like the years 1914, 1939, 1945 and 1989, the year 2022 has the potential to be one that generations of kids will be forced to memorize in history classes. Although the war in Ukraine and its geopolitical consequences will likely be the focus of those lessons, there are also global challenges related to dealing with an unstable inflationary environment.

Given that the United States accounts for 24% of the world’s gross domestic product (GDP), how the U.S. handles its inflationary problem will go a long way toward restabilizing the world economy, even if there are components of inflationary pressures in various countries that are not directly related to actions in the U.S. Currently, inflation is at the highest rate in the U.S. in 40 years. In response, the Federal Reserve (Fed) is raising interest rates to slow down the economy as economic theory says it should. However, we must consider the possibility that the economy does not function exactly the way we think it does. Over the last 14 years since the 2008 financial crisis, the Fed has expanded its balance sheet by about nine times the size of what it was in 2007, meaning certain monetary actions by the central bank might not respond exactly the way policy makers and observers might expect.

In particular over the last three years, massive amounts of liquidity (e.g., increased money supply) have been injected into the economy to keep it afloat during the pandemic. This was necessary, as failure to do this would have resulted in massive unemployment and deflation which would have been much harder to manage (think the Great Depression). However, the unavoidable cost of this policy action is the inflation we see now.

Another driver of the inflation, albeit less important, is the upward wage pressure driven by a tight labor market. Currently, virtually all industries, and in both the U.S. and Europe, are experiencing labor shortages for reasons that are not entirely clear at this time. It is possible that the pandemic and associated lockdowns have caused a shift in the global work culture that has led a portion of the labor force to drop out. Some of this could be accelerated retirement of those who had been nearing that age but decided to accept a slightly lower standard of living going forward, rather than continue working for a couple of more years. Or it could be something else. At this point, we do not know and it is likely something that will only be clear in hindsight. Regardless, the tight global labor market is another factor driving inflation.

Although the spike in energy prices has also been driving inflation, at the time of this writing in October 2022, we may be seeing the beginnings of this mitigating. On Nov.1, 2021, the price of natural gas was $4.56 metric million British thermal units (MMBtu) and down from $9.12 in August of 2022. By the same token, crude oil is $85 a barrel, and down from $120 a barrel in June. While some of this is due to the Biden Administration releasing some oil stored in the Strategic Petroleum Reserve, some of it is also likely due to the U.S. entering a recession, as well as the increase in U.S. interest rates. As the U.S. is increasing interest rates at a faster rate than many other countries, the U.S. dollar is getting stronger. And since global oil prices are quoted in U.S. dollars, a stronger dollar means a lower price of oil (all else equal).

Over 2023, the primary focus of economic policy makers will continue to be inflation. Although the Fed has a dual mandate of maximizing employment and minimizing inflation, right now it is completely focused on inflation and is likely to remain so for the foreseeable future. While the Fed’s interest rate hikes will slow the economy down through reduced demand for credit, they are likely also going to have to draw liquidity out of the market by selling treasury bills and then impounding the cash in the proverbial vault in order to reduce the money supply. One possible result of this could be a brutal recession, the likes of which we have not seen in 40 years. While some optimists are predicting a soft landing as they often do, very rarely do these occur. And when they do, it is not usually in the context of a globally destabilizing pandemic and a major war in Europe.

The Pump Industry

Overall, it appears that the relatively stable global economic environment the world has enjoyed over the last 30 to 40 years is now in the rearview mirror as the global geopolitical economic system appears to be in transition. With global inflation and political instability increasing due to multiple factors, not the least of which is the war in Ukraine, the value of the secure availability of replacement units is going to be increasing. The pandemic showed the downside of global supply chains. During the last 30-plus years of relative stability, companies were focused solely on the bottom line, and that led them to source products from around the world. During the pandemic, and now reinforced by the war in Ukraine, the value of having shorter supply lines and readily available inventory is becoming clearer for many businesses.

While the industry is likely to be dealing with the same factors that will affect every business from labor shortage to reduced demand for products during a recession, in the medium-to-longer term, we believe the underlying trends portend positive times ahead for the industry generally. The first is increased infrastructure spending in the U.S. that was pushed by the Biden Administration that will be rolled out over the next few years. The second is the fact that an increased emphasis on having backup inventory readily available is likely to provide elevated demand for several years. Extremely unstable times in history are usually followed by increased societal demand for protection against future instability. The global instability today is not likely to give way to a return to the stable environment that we in the West have enjoyed over the last two generations.

In the case of Europe, in addition to the aforementioned factors, the pump industry is likely to benefit at some point when the shooting stops in Ukraine. With the damage that Ukrainian infrastructure is sustaining under Russian missile attacks, there is going to be a need for massive rebuilding.

Finally, for those companies that specialize in the oil and gas industries, the current higher prices are likely to spur investment into new sources of energy. The higher prices the world is experiencing would by itself incentivize fossil fuel companies to expand production. However, Western consumers are getting hit with much higher fuel, oil, gas and heating prices, which is seriously impacting their financial bottom line and even the ability to heat their homes in some cases. While certain environmental organizations and political parties seem to welcome this as a way to force people to move to renewable energy sources, the reality is that many people do not currently have the option to transition to an electric vehicle, either due to infrastructure or financial constraints. Due to the high energy costs that are impacting consumers throughout the West, the coming years are likely to find dissatisfaction expressed through the ballot box in many countries, thereby resulting in more pro-fossil fuel governments and regulatory environments.

It is the opinion of the authors that the next couple of years are likely to see a significant recession in the U.S. and other Western countries, and the geopolitical/relative economic stability that characterized the last 30 to 40 years is likely not coming back. However, for nimble pump companies who are able to adjust to the new reality, the medium-to-long-term future could actually be brighter than it might currently appear.

The View From Europe

Despite current political and economic uncertainties, the general focus of the European pump industry through Europump continues to be on environmental and energy savings issues in conjunction with the European Union Green Deal initiative, Europe’s agenda for sustainable growth. The European Green Deal is described by the European Commission as follows: “It is a new growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use.”

To support the Green Deal, Europump has several working groups currently involved in studying and addressing various issues. These include:

Eco-Design: Pump efficiency

Extended product approach: Efficiency of pump and drive systems

Science-based targets initiative (SBTI): Greenhouse gas reduction

Drinking water: Safe water supplies

Circular economy: Maximize material resources and efficiency in pump production, use and repair

Polyethylene furanoate (PEF): Minimize the carbon footprint in pump production and operation

Perfluoroalkyl and polyfluoroalkyl substances (PFAS): In conjunction with other industries, assisting the European Commission in implementing rational regulations that will minimize the entry of PFAS into the ecosystem without severe social and economic consequences.

Other areas of Europump focus include harmonizing European and U.S. pump test standards, developing test standards for submersible motors and digitization.

From an economic standpoint, the general view from the European pump industry’s economic consultants is that a recession is certain, but that it will be both relatively mild and not particularly long. There will be energy shortages throughout Europe this winter and perhaps longer that will lead to continued price increases. But the opinion is that while these issues will be significant, they can be addressed, albeit with some level of difficulty. Whether or not this position turns out to be correct remains to be seen.