EMI: Declining order intake damps industrial growth

In view of the growing reluctance of many companies and customers as well as the still restrained demand in the automotive industry, the German industrial PMI fell by 0.3 points to 51.5 in December 2018 compared with the previous month.

The years of plenty are over: After almost a decade, the German economy is slowly cooling down. Photo: pixabay.com

Growth in German industry continued to weaken in the last month of the year. This is signalled by the seasonally adjusted IHS Markit/BME-Einkaufsmanager-Index (EMI), which fell slightly in December 2018 to 51.5 points from 51.8 in the previous year. This value is the lowest since March 2016; at the same time, the German industrial PMI fell for the fifth month in a row.

The declining number of new orders continues to hurt the manufacturing sector of Europe's largest economy, according to English financial services provider IHS Markit. In this context, numerous survey participants reported on the growing reluctance of many companies and customers as well as on the still restrained demand in the automotive industry.

“The German industry must prepare itself for a much stronger headwind in 2019,” emphasized Dr. Silvius Grobosch, Managing Director of the German Association for Supply Chain Management, Procurement and Logistics (Bundesverband Materialwirtschaft, Einkauf und Logistik e.V., BME), in Eschborn on Tuesday. In his opinion, the cost pressure would “remain high in the coming weeks as well. However, the buyers could benefit from the relatively low raw material prices.”

“According to the EMI, the economic slowdown that began about a year ago is still continuing. But there is a good chance that the trend will turn around in the course of this year,” said Dr. Gertrud R. Traud, Chief Economist at Helaba Landesbank Hessen-Thüringen, commenting on the current EMI data in response to a BME request on Tuesday. Two factors are particularly conducive to growth: a more expansive fiscal policy in Germany and Europe, but also probably in China, on the one hand, and the sharp fall in the price of oil, on the other. “We therefore expect the German gross domestic product to continue growing above the employment threshold in 2019 at around 1.5 percent,” the Helaba Bank Director concluded.

“Tension in the industry is increasing,” said DIHK economic expert Sophia Krietenbrink on Tuesday, assessing the latest EMI data. The distortions in trade policy and the challenges in the automotive industry were clearly felt in 2018. In the new year the Brexit creates additional uncertainty. According to the DIHK economic survey, concerns about weaker demand in Germany and abroad are increasing noticeably overall. In view of these uncertainties, the investment intentions of industrial companies also declined noticeably.

“The global news situation is giving us mood swings between relief and concern,” Dr. Ulrich Kater, Chief Economist at DekaBank, told the BME on Tuesday. Recent reports from the negotiations between the USA and China or a slight “yielding” of the Italian government in the budget dispute had succeeded in smoothing out some worries. At the same time, however, downward revisions of economic forecasts are taking place, and the Brexit process is taking on increasingly chaotic traits. In addition, December had been hailed up by the protests in France – after all Germany's second most important trading partner. Kater: “These problems should remain on the agenda in 2019 as well.”

With a view to the recent development of the EMI sub-index “purchase prices”, Dr. Heinz-Jürgen Büchner, Managing Director of IKB Deutsche Industriebank AG, told the BME on Tuesday: “The drop in the price of crude oil, which was stronger than expected, has already impacted on large parts of the value chain in plastics production. Here we see further potential for price reductions. The current crude oil price is also making the first fracking projects unprofitable. However, the cuts in OPEC production could soon reverse the trend.”

The development of the EMI sub-indices at a glance:

Industrial production: The production level grew more strongly in December than at any time in three months. Nevertheless, it was one of the weakest growth rates since the beginning of the growth phase more than five and a half years ago. The increase was almost exclusively due to growth in the consumer goods sector, where more new orders boosted production.

Total order intake/exports: At the end of 2018, the drop in order intake was again greater. The third consecutive decline pushed the subindex to its lowest level since November 2014. Some survey participants pointed to lower demand in the automotive industry, while others felt that the general uncertainty of many customers had a negative impact on sales figures. Manufacturers of intermediate goods registered the sharpest losses. In the capital goods sector, the decline was also striking.

The renewed decline in new orders from foreign-based companies also contributed to the decline in total incoming orders. What's more, the seasonally adjusted export order sub-index continued to slide to its lowest level since December 2012. A whole series of managers surveyed attributed the drop to lower sales in China. Political uncertainties and tensions also curbed global demand.

Employment: In an effort to expand capacities and increase sales through increased marketing and sales activities, companies continued to expand their jobs. Although the growth rate rose slightly compared with November, it remained at one of the lowest levels of the past two years.

Purchasing/sales prices: At the end of the year, the inflation rate of purchase prices weakened noticeably. Accordingly, the seasonally adjusted subindex was at its lowest level since August 2017. As some survey participants reported, this was mainly due to lower prices for oil and steel. Nonetheless, cost pressures remained high as electronic components, energy and wage costs, among other things, increased.
In order to at least partially offset the higher costs and at the same time secure profit margins, many industrial companies were again forced to raise their offer prices. Although the rate increased slightly compared to November, it remained below the record levels of the beginning of the year. Intermediate goods manufacturers recorded the steepest increase. The increase was lowest in the consumer goods sub-sector, although cost pressure increased most sharply there.

Outlook for the year: The subindex remained below the threshold of 50.0 points in December, signaling for the third time in a row that the majority of managers surveyed tend to be pessimistic about the future. As in the previous months, the stumbling automotive industry, the uncertainties associated with Brexit and the trade conflicts were the main causes of concern in the executive floors of the manufacturing industry.

About the EMI: The IHS Markit/BME Purchasing Managers Index (EMI) provides a general overview of the economic situation in German industry. The index has been published since 1996 under the auspices of the Bundesverband Materialwirtschaft, Einkauf und Logistik e.V. (Federal Association of Supply Chain Management, Procurement and Logistics, BME), Eschborn. It is produced by the provider of corporate, financial and economic information, IHS Markit, headquartered in London and is based on a survey of 500 purchasing managers/managing directors of the manufacturing industry in Germany (selected representative of the German economy by sector, size and region). The EMI is modelled on the US-Purchasing Manager´s Index (Markit U.S.-PMI).

Frank Rösch, BME Economic and Raw Material Monitoring

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