04.09.2020 // Politics

Business conditions continue to recover across manufacturing sector during August

Sustained rebound in new orders sees output growth hit 30-month high. Upturn supported by revival in export sales.

Is the german economic engine starting up again and has the industry already managed to leave the corona recession behind? It seems so. The latest EMI data give cause for cautious optimism. Photo: Markus Thomas/pixabay.com Is the german economic engine starting up again and has the industry already managed to leave the corona recession behind? It seems so. The latest EMI data give cause for cautious optimism. Photo: Markus Thomas/pixabay.com

Latest PMI data showed a further improvement in business conditions across the German manufacturing sector in August, with new orders continuing to rebound from the lows during the coronavirus disease 2019 (COVID-19) lockdown and growth of production reaching the strongest for two-and-a-half years. Goods producers meanwhile noted a further marked round of job cuts, though the decline in employment eased amid improved expectations and steadily rising backlogs of work.

The headline IHS Markit/BME Germany Manufacturing PMI® – a single-figure snapshot of overall business conditions – improved to a 22-month high of 52.2 in August, up from 51.0 in July. The index has risen in each month since hitting an 11-year low at the height of the COVID-19 lockdown in April.

Supporting the rise in the PMI in August was a faster increase in output which, after having returned to growth territory for the first time in 18 months at the start of the third quarter, showed the strongest expansion for two-and-a-half years. The upturn in production was led by the intermediate and consumer goods categories, with makers of investment goods lagging behind.

Manufacturers raised output in line with a further marked rise in new orders in August. The increase, which was only slightly slower than July's 30-month high, was often attributed to recovering demand, as well as a degree of catch-up following the lockdown period. Sustained growth in export sales also helped bolster overall order books, with rising sales to markets including China and Turkey helping drive the fastest increase in export orders since April 2018.

The sustained upturn in incoming new business was reflected in a build-up of backlogs of work during August. Manufacturers still continued to cut employment, however, linking this to cost cutting, the streamlining of workforces and restructuring. The rate of job shedding eased to the weakest for five months, though it was still marked by historical standards.

Manufacturers' purchasing activity returned to growth in August, following decreases in each of the previous 22 months. The increase was only marginal, however, as some firms looked to reduce stocks of inputs. Pre-production inventories decreased for the fourth month in a row and to the greatest extent since January. That was accompanied by an even steeper fall in stocks of finished goods, which continued to be scaled back after record growth in the second quarter.

With demand for raw materials and other inputs still relatively subdued, manufacturers reported a further drop in purchasing costs in August. That said, the rate of reduction eased for the third month in a row to the weakest since May 2019. Similarly, though output prices continued to fall amid reports of pressure from clients, the decline, like in July, was only marginal and notably softer than at the height of the COVID-19 crisis.

Turning to supply chains, lead times on inputs increased for the first time in three months in August, following marginal improvements in both June and July. Reports of delays remained well below the levels seen during the initial lockdown period, however.

Lastly, August's survey indicated a further improvement in manufacturers' expectations towards activity over the coming year. The degree of optimism was the highest since February 2018, with a growing number of companies hopeful of a sustained recovery in domestic and export demand.

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