European manufacturing misery? Some sectors have never had it so good

European manufacturing looks broadly miserable — expensive energy, China pressure, legacy sectors fading — and yet, in places, it’s never had it so good.

Europe’s industrial base is having a bit of a split-screen moment. On one side: chemicals, metals and other energy-guzzling stalwarts. All are still reeling from high gas prices and now staring down another squeeze as oil and natural gas jump on the back of the war in the Middle East.

On the other: weapons, planes and anything with a defence budget attached. These are quietly (or not so quietly) booming.

The latest Eurostat data captures the divergence neatly. Eurozone industrial production fell 1.2 per cent year on year in January, with chemical output down a chunky 6.6 per cent. Meanwhile, production of weapons and ammunition jumped 31 per cent to a record high.

Germany tells the same story, just with more angst. Overall manufacturing output shrank 1.6 per cent on the year to January and was no bigger than it was in 2010. But weapons production? Up 78 per cent to levels never experienced before.

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Monthly data are noisy, but the direction of travel is becoming clearer: wars and successive shocks are reshaping Europe's industrial mix. Defence-linked sectors are thriving; energy-intensive ones are not.

And the latest Middle East shock risks entrenching that divide. As Oxford Economics’ Sean Metcalfe puts it, a prolonged conflict could “reinforce” the trends already in play. Read: more pain for chemicals and friends.

There are pockets of lift elsewhere. Aerospace is having a moment, with eurozone output up 15 per cent on the year to January and posting double-digit growth in most recent months; the UK is tagging along at a respectable 7 per cent. Defence spending helps, obviously. (The UK does not report on the production of weapons and ammunition.)

Zoom out, and the backdrop is hardly subtle. Europe faces its most acute security challenge in decades, from Russia’s war in Ukraine to a US that looks increasingly unwilling to provide Europe’s military security and shows conflicting interests with the old continent in the Middle East. Rearmament is no longer theoretical.

Metcalfe expects the defence to become a “very important driver of industrial performance” in Europe, with effects rippling through supply chains into areas such as metal products, aerospace and certain types of transport equipment.

The companies are already obliging. Hensoldt, a German multinational corporation focusing on sensor technologies in the defence, security and aerospace sectors, reported a 62 per cent increase in order intake to a record high in the 2025 financial year, alongside rising revenues and profitability.

“The geopolitical situation is forcing Europe to sustainably strengthen its defence capabilities,” said Oliver Dörre, CEO at Hensoldt, noting faster and more concrete procurement decisions.

Italy-based aerospace, defence and security company Leonardo plans to hire 28,000 people to reach a workforce of 75,500 by 2030, after recruiting 20,000 between 2023 and 2023 as it reported double-digit growth rates in new orders, revenues and profits in 2025. Sales have nearly doubled since 2021 at Swedish aerospace and defence company Saab.

Elsewhere, it’s a different story. As ING’s Edse Dantuma notes, Europe is where the macro hit “lands hardest”, with industry taking it on the chin at precisely the wrong time. The usual suspects — chemicals, basic metals, plastics, paper — sit top of the vulnerability list.

Some of the pain is delayed. Hedging means not every factory feels higher gas prices immediately. Oil, though, feeds through faster — via fuel, transport, and everything that depends on them.

And this is landing on an already weakened base. In January, chemical production was no larger than it was a decade ago in the UK, and was down 27 per cent from its 2022 peak in the Eurozone.

Steve Elliott, chief executive of the UK-based Chemical Industries Association, said that many chemical factories closed over the last four years, due to “uncompetitive energy costs,” which were already four times higher than those faced by competitors in countries such as the US.

“What is happening as a result of the international conflict adds significantly to that.”

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There are a few other bright spots. Pharma is doing well (helped, yes, by weight-loss drugs), and food and drink remain relatively resilient, cushioned by domestic demand and intra-European trade.

But elsewhere, it’s tougher going. Cars and machinery are under pressure from Chinese competition, with eurozone vehicle output still 31 per cent below its 2017 peak. Textiles and leather continue their slow fade.

The bigger risk is that this divergence doesn’t stay neatly contained. Persistent disruption to energy markets could push up inflation and weigh on business confidence across the board, hitting sectors from construction to furniture.

Meanwhile, the war in Iran adds urgency to Europe’s rearmament push.

“We think defence-facing sectors will outperform in Europe this year,” said Metcalfe.