This recession heatmap was first published in March 2019 and was most recently updated in June, 2022
Oliver Wyman introduced the Recession Heatmap in 2018 to help industrial businesses assess the likelihood of a recession in their respective sectors. Our Lead Indicator has the potential to signal a looming recession as early as 3 to 4 quarters before it hits, as back testing on the 2008 recession demonstrates.
While the Lead Indicator recovered during 2021, this changed with the outbreak of the war in Ukraine accompanied with continuous supply-chain issues and the economic cooling in China due to continuous lockdowns. In Q2 2022 it has turned dark red again against the ongoing economic volatility and rising inflation. While the shape, length and depth of the coming recession is still unclear, it’s important that companies prepare for and implement appropriate strategies for optimization or transformation under different scenarios.
Click through the Recession Heatmap to view the indicators and the economic situation of the different mechanical engineering segments in Germany and the EU from 2006 until today. Come back and visit the Recession Heatmap whenever economic uncertainty is growing.
A New Kind of Crisis for the Industrial Goods Sector
The current crisis affecting the industrial goods sector is different from previous ones – with ongoing global volatility and rising inflation, it has a different starting point, different mechanics, and subsequently requires different strategies.
A different starting point:
Normally, there are recovery periods of several years between recessions. This time, the last recession in the mechanical engineering sector only began at the end of 2019 and then even got “boostered” through the COVID pandemic. While, in general, the sector recovered strongly during 2021 some companies are still weary from the pandemic and business levels overall are still below the peak of 2018. Some sub-sectors are more than 20% below pre-crisis levels and are facing additional structural challenges. The likelihood of a recession rises as the Lead Indicator illustrates, and this should put companies on alert.
While prior recessions were mostly demand driven, the potential next recession is being triggered by supply side events: severe shortages in material supply due to sluggish re-ramp-up after COVID and renewed lockdowns in China as well as soaring costs due to these shortages, exacerbated by exploding energy costs in the wake of the Ukraine war. As a result the sector – while sitting on order books at all-time highs - is now facing a crisis, which is already manifests itself in declining production while incoming orders were still growing (as the recession heatmap illustrates). The resulting pressure on margins, high working capital requirements and general uncertainty have begun to make businesses very cautious and to delay investments – hereby further fueling the risk of a recession.
So far, most industrial companies have been in a wait-and-see attitude - hoping for a fast end of the Ukraine war and of China’s lockdowns. Now they need to prepare for more unfavorable scenarios. Understanding different scenarios and their company’s options under each will be more important and more difficult than in typical recessions, especially as the triggers of the recession may not be temporary but rather a reflection of deep structural changes in the geopolitical and economic setup of the world. Companies also need to secure financing of unusually high working capital. The high, far-reaching order books can involve significant margin risk that need to be mitigated. And lastly, companies need to review and reconfigure their supply chains to increase resilience against supply shocks like the current one in the future. More than ever, those companies that do not only hibernate but use the downturn for transformational moves will be the winners in the next upswing that is certain to come at some point – you will see it when our heatmap turns green again.
Learn how to emerge as a winner from the next recession (video produced in 2019).