EMI: Industrial production continues to decline despite initial bright spot
The IHS Markit/BME Purchasing Managers' Index (EMI) rose by 1.6 points in January 2020 to 45.3 points compared with the previous month. The German PMI thus reached an eleven-month high. However, it is still too early for an all-clear. This is because the important leading indicator for the development of the manufacturing sector in Germany has been moving continuously for more than a year below the magic 50-point reference line, which signals economic growth.
The contraction in Germany's industrial sector eased at the beginning of the new year. The main reason for this was the smallest drop in new orders in fifteen months, the English financial services provider IHS Markit announced in London. In the first month of the year, the seasonally adjusted IHS Markit/BME Purchasing Manager Index (EMI) climbed to 45.3 points, reaching an eleven-month high. After 43.7 in December and the ten-year low of last September, this is now the third improvement in the past four months. Nevertheless, the index is still clearly in the contraction zone.
"The surprisingly strong rise in the EMI could mark a turning point for German industry. Particularly encouraging are the revival of the performance sub-index, the improved outlook for the year and the falling purchasing prices," stressed BME CEO Dr. Silvius Grobosch in Eschborn on Wednesday.
"The picture of a recovering economy remains intact. The headwind that blew in the face of German industry last year should therefore ease somewhat," Dr. Ulrich Kater, Chief Economist of DekaBank, told the BME on Wednesday.
Nevertheless, in his opinion, the economic trees are not growing into the sky. On the one hand, the German showpiece industry - the automotive industry - is struggling with abrupt structural change, and on the other hand, income growth would flatten out. However, economic support comes from the state, which is relieving the strain on households and must continue to invest in infrastructure. Kater: "The economic recovery is coming, but it will be difficult."
"Although the EMI is climbing to an eleven-month high, there can be no talk of upswing euphoria among German companies at the moment", Katharina Huhn, head of the department for economic activity, growth and company surveys in the DIHK, told the BME on Wednesday. Even though export business is doing somewhat better again, production in Germany is being cut back further and employment in industry is also falling. According to the DIHK business survey, domestic demand, economic policy conditions and energy and raw material prices are significant risks for many companies. In order to give the German economy a tailwind again, "we should turn our attention even more intensively to issues such as the need for modernization and an acceleration of infrastructure projects, the energy turnaround and rising energy prices," concluded Huhn.
On Wednesday, Dr. Heinz-Jürgen Büchner, Managing Director Industrials, Automotive & Services of IKB Deutsche Industriebank AG, told the BME about the latest development of the EMI sub-index purchasing prices:
"Although steel scrap prices rose again in January 2020 and steel prices rose again for the first time since January 2019, price declines are expected for the time being, especially for listed raw materials. The reason is above all the effects of the coronavirus on the Chinese and global economy. While the primary production of aluminum, copper or zinc in China is continuing normally, the plant holidays of the customers have been significantly extended. In addition, considerable disruptions in logistics have been observed in the People's Republic due to driving bans in certain regions. This is leading to temporary oversupply of raw materials, which, however, should be rapidly reduced once normalization in China has been achieved.
Overview of the development of the EMI sub-indices:
Industrial production: The seasonally adjusted performance sub-index improved slightly in January and was at a five-month high. However, it remained clearly in the red and signalled a further decline in manufacturing output. The twelfth consecutive decline again reflected the fundamentally low level of demand in the sector. It was also not the first time that the contraction was again spread across all three sub-sectors of industry (consumer, intermediate and capital goods).
Total incoming orders / exports: The number of new orders fell only slightly in January. It was the lowest rate of shrinkage since October 2018 when the downward trend began. Although many survey participants once again complained about the economic and political uncertainties that are having a negative impact on investment decisions and the awarding of contracts, there were some who reported a slight revival in demand.
Export orders approached a stable level in January. The corresponding sub-index was only marginally below the growth threshold of 50.0 points and thus at its highest level in the 17-month contraction phase. Some of the managers surveyed reported that demand picked up, particularly in China and the USA. Manufacturers of consumer goods recorded growth, while companies in the intermediate goods sector recorded hardly any change. The capital goods sector remained at the bottom of the league, but the decline here slowed somewhat.
Employment: January data showed a further significant decline in the level of employment in industry, extending the current downturn to eleven months. The rate of contraction remained unchanged compared with the previous month, making it one of the strongest since the global financial crisis. According to sector data, the reduction in the workforce was concentrated in the intermediate and capital goods sectors.
Purchasing/sales prices: In January, industrial companies again registered lower prices for raw materials. About 28 percent of the survey participants reported a reduction in prices, pointing in particular to the fall in raw material prices (especially steel). In addition, oversupply in many places is undermining the pricing power of suppliers. Despite a slight mitigation, the rate of decline remained strong overall.
Strong competition for new orders again led many manufacturers to pass on their cost savings in purchasing to their customers in the form of discounts on sales prices. This continued the trend that began last July. The corresponding rate of contraction accelerated compared with December and was above the average for the current downturn phase. While sales prices for consumer goods became more expensive, they became cheaper for intermediate and capital goods.
Outlook for the year: The annual outlook sub-index improved in January for the fifth consecutive month after the record low of last August. Thus, optimism among German manufacturers rose at the beginning of the new year to its highest level in almost one and a half years. In particular, the first signs of an easing in the trade dispute lifted the mood among purchasing managers. In addition, many expect both investments and exports to rise again.
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 and managing directors of the manufacturing industry in Germany (selected by sector, size, region representative of the German economy). The EMI follows the model of the US-Purchasing Manager's Index (Markit U.S.-PMI).