With the first half of 2013 behind us, it is time to re-examine IBO’s industry forecast for 2013 made in January (see IBO 1/15/13). As in previous years, we should note that our estimates for 2013 were somewhat handicapped by the fact that we did not have the benefit of fourth quarter results for 2012, and the global business climate that lay ahead was by no means settling. Now that we have a better handle on how the industry did in 2012, our prediction of growth for that year has been reduced to 2.1% from our initial estimate of 2.4%; not earthshaking, but a more dismal backdrop for prospects in 2013.

The global economic situation has deteriorated somewhat as the result of macroeconomic events in the US and especially Europe. In addition, developing nation growth has slowed, particularly China, partly as the result of the global situation, but also due to developmental difficulties in China itself. During the early months of 2013, most forecasting groups became more circumspect and began to lower estimates of global economic growth for 2013 and 2014. Prospects in America have been trimmed and expectations for Europe continue to be mostly gloomy, while growth prospects for China and India have also been lowered.

The economic outlook in America dimmed significantly as the result of government actions, although some might say inactivity. Specifically, something referred to as sequestration. Actually, the term “budget sequestration” (or sequester) refers to automatic spending cuts in particular categories of federal outlays. In 2013, specifically, sequestration refers to a section of the Budget Control Act of 2011 that was initially set to begin on January 1, 2013, as an austerity fiscal policy. These cuts were postponed by two months by the American Taxpayer Relief Act of 2012 until March 1 when this law went into effect (see IBO 3/15/13).

The reductions in spending authority are approximately $85 billion during fiscal year 2013, with similar cuts for fiscal years 2014 through 2021. The cuts are split evenly by dollar amounts, not by percentages, between the defense and non-defense categories. The Congressional Budget Office estimated that sequestration would reduce 2013 economic growth by about 0.6 percentage points from 2.0% to 1.4%, or about $90 billion, and affect the creation or retention of about 750,000 jobs by year end. The blunt nature of the cuts has been criticized, with some favoring more tailored cuts and others arguing for postponement while the economy improves.

Growth has clearly slowed in the US, and the impact of the sequester is being felt more and more as each month passes. Difficulties in Europe have further impacted the US, as its major export customers are not exactly in a buying mood given poor economic conditions, which are not expected to improve until 2014.

IBO’s original forecast for analytical and life science instrument industry sales in 2013 was a growth rate of 3.6%. Although clearly not an ebullient projection, it did represent a solid improvement over what had become a very disappointing 2012. With the US “fiscal cliff” negotiations behind us and prospects of some resolutions to the malaise in Europe, such a forecast certainly seemed achievable. However, it now looks as if conditions have become even less favorable to the industry, and prospects for 2013 require a reassessment.

Most industry suppliers have reported slower growth for their businesses during the first half of the year, especially in the first quarter. Market conditions overall have deteriorated, particularly in the US, while a dramatic change in the exchange-rate situation, with a strengthening dollar and declining yen, has combined to depress revenue growth. So IBO is revising its forecast for 2013 down to just 2.7%, with the possibility of an even slower performance.

Macroeconomic trends have progressively deteriorated since January, suggesting a challenging climate for improving prospects in the current year and that 2014 will only be marginally better. In April, the International Monetary Fund (IMF) issued its “Revised World Economic Outlook” forecast of slower growth for 2013 and 2014. Then, in July, the IMF provided an update on its “World Economic Outlook” that is even more pessimistic.

The IMF shaved its forecast of growth for the world from its previous estimate in April. It has lowered its projections for the year in America, the Eurozone and the BRIC (Brazil, Russia, India, China) countries. For the US, it forecasts growth of 1.75% for 2013 and 2.75% for 2014. The euro area will remain in recession in 2013, with activity contracting 0.5% and rising to just under 1% in 2014. Japan’s growth will average 2% in 2013, moderating to about 1.25% in 2014.

Clearly, macroeconomic activity will affect the prospects for our industry, but not necessarily in the same way in the various country markets. As the graph on this page for regional growth for instrument sales illustrates, not every region has been revised downward to the same extent. In fact, China’s growth rate has been increased to 8% from 7.4% as instrument companies have emphasized that it is one market with good growth. This is evidenced by the fact that so far this year, several large instrument companies have reported strong double-digit growth in China.

On the other hand, the other emerging markets of Latin America, India and other Asia-Pacific show a big falloff because of reduced prospects for exports to developed countries. Europe and Japan have also been downgraded, but not as severely, as their growth was already modest at best.

Growth estimates for end-user markets also differs significantly by type. The pharmaceutical and biotechnology market, which also includes CROs, continues as the leading market but at a slightly reduced growth level of 4.3%. The applied markets of food testing, environmental testing, energy and clinical diagnostics are also attractive markets, with a revised projection of 3.9% growth. Government and academia markets have been the most affected by governmental cost cutting, especially in the US, and growth for them has been reduced from what we had projected in January. The industrial markets of chemicals, metals, semiconductors and other manufacturing-oriented sectors have been hit hardest by the global economic downturn and will likely continue to suffer the longest before rebounding.

Industry growth for most analytical techniques has also been lowered, consistent with the overall slowing of the total market. MS is still expected to be the fastest growing technology sector. Another technology sector continuing to offer promise is separation science. As always, selected product lines in every technology sector will offer better-than-average growth, but not enough to affect the sector overall.