EMI slides back into negative territory due to sharp drop in orders

The IHS Markit/BME-Einkaufsmanager-Index fell by 1.8 points to 49.7 in January 2019 compared to the previous month. The German PMI thus fell below the 50-point mark for the first time since November 2014.

Foto: Pixabay

German industry was unable to overcome its weak phase at the beginning of 2019. The decline was mainly due to the strongest drop in new orders for more than six years. This is shown by the current results of the survey on the IHS Markit/BME Purchasing Managers Index (EMI). With 49.7 points (51.5 in December 2018), the important leading indicator for the manufacturing sector in Germany slipped just below the growth threshold of 50.0 points in January for the first time in more than four years, according to the English financial services provider IHS Markit.

Uncertainty among customers, trade conflicts and the weak automotive industry are still the main reasons that not only curb demand but also cloud the business prospects of both global players and SMEs. Furthermore, the inflation rate of purchase prices continued to weaken in January, falling to its lowest level for more than two years. According to IHS Markit, the main reasons for this were the lower prices of some raw materials and lower purchasing requirements.
“The decline in industrial production in recent months should not be viewed too critically. Although the boom phase is probably over for the time being, the order books of most companies are still well filled,” emphasized Dr. Silvius Grobosch, Managing Director of the Bundesverband Materialwirtschaft, Einkauf und Logistik e.V. (Federal Association for Materials Management, Purchasing and Logistics; BME) on Tuesday in Eschborn.

“At the beginning of the year, the mood in German industry was even worse, according to the EMI. However, this should not be seen as a harbinger for 2019 as a whole,” 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. On the contrary, the chances are high that a higher value can be expected as early as next month. The strong recovery of the stock markets, the trade talks between the USA and China, the monetary and fiscal policy stimulus in China as well as the low oil price provided a tailwind. “At an annual average of around 1.5 percent, German GDP is likely to be roughly as high as in the previous year. We expect the German stock market to again exceed 13,000 index points in the course of the year due to the expected economic recovery and currently low valuation,” the Helaba Bank Director concluded by informing the BME.

“The economic news situation is becoming increasingly frosty: global demand continues to weaken, especially in China, the Brexit is becoming more and more threatening, political stability is at stake in France and Germany is still waiting in vain for a rebound in the automotive industry,” Dr Ulrich Kater, Chief Economist at DekaBank, told the BME on Tuesday. No wonder that confidence is waning, no wonder that economic forecasts are being revised downwards. Kater: “In addition there are now also the frosty temperatures, the construction industry reports more severe hindrances than usual.

With a view to the latest development of the EMI sub-index purchase prices, Dr. Heinz-Jürgen Büchner, Managing Director Industrials, Automotive & Services of IKB Deutsche Industriebank AG, told the BME on Tuesday: "The current EMI was also significantly affected by the development on the steel markets. On a monthly average, prices for hot-rolled wide strip and galvanized sheet were a good two percent lower than in the previous month, while wire rod prices remained relatively stable. On the starting material side, scrap prices slumped sharply as a result of very low Turkish exports and low domestic orders (including maintenance work). On the other hand, iron ore prices had risen by an average of a good five percent per month. Büchner: "Recently they received a strong boost from the dam burst in Brazil. There were fears of major supply disruptions at Brazil's largest ore producer. Against this backdrop, steel prices could possibly quickly correct the January losses."

The development of the EMI sub-indices at a glance

Industrial production:
In the first month of the year, production by German manufacturers increased only minimally. Accordingly, the rate of increase fell to the shared lowest level since the beginning of current growth in May 2013. The declines in the capital goods and intermediate goods sectors almost completely offset the strong increase in the consumer goods sector.

Total order intake/exports: The downward trend in new orders continued in January. What's more, the fourth consecutive drop was more severe than at any time in more than six years, mainly due to significant declines in the capital goods and intermediate goods sectors. As some of the managers surveyed reported, the continuing weakness of the automotive industry and the uncertainty of many customers had a particularly negative impact on business.
After adjusting for seasonal factors, the export order intake sub-index fell below the neutral 50.0 mark for the fifth time in a row. The current decline was also the strongest since the end of 2012, when the eurozone debt crisis peaked. Many respondents indicated that sales figures were lower, particularly in China, but also in the US, UK, Turkey and Italy.

Employment: Despite shrinking new orders, companies continued to increase employment, which also spread across all three sectors of industry. The corresponding subindex was slightly below the previous month's level, the second-weakest in more than two years, but still above the long-term average.

Purchase/sale prices: For the third month in a row, purchase price inflation in January fell to its lowest level since October 2016. According to survey participants, the recent price declines for oil and steel had a mitigating effect on cost increases. Companies that reported an increase mostly pointed to higher transport costs, wage pressure and the dollar/euro exchange rate.
Although the cost pressure in the manufacturing sector eased significantly in January, the rate of increase in sales prices changed only marginally compared with December. The seasonally adjusted subindex remained well above its historical average of 51.6 points. Manufacturers of consumer goods, whose costs rose most sharply, also recorded the sharpest rise in selling prices.

Outlook for the year: The business outlook remained virtually unchanged at the start of 2019. The corresponding subindex again remained just below the reference line of 50.0 points, which means that a small majority of the purchasing managers surveyed anticipate lower production levels. According to some survey participants, the main reasons for the pessimism were uncertainties in connection with the Brexit, concerns about global trade conflicts and a continuing weak automotive 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 under the auspices of the BME since 1996. It is compiled by IHS Markit, a provider of corporate, financial and economic information headquartered in London, and is based on a survey of 500 purchasing managers/managers of the manufacturing industry in Germany (selected as 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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