EMI: Industrial production continues to stabilize

The IHS Markit/BME Purchasing Managers' Index (EMI) rose by 2.7 points in February 2020 to 48.0 points compared with the previous month. After the important leading indicator for the development of the manufacturing industry in Germany had already risen again in January, it continued its stabilisation course in the following month.

The manufacturing sector in Germany remained on course for recovery in February. The seasonally adjusted IHS Markit/BME Purchasing Managers' Index (EMI) climbed to a 13-month high of 48.0 points from 45.3 in January, according to the British financial services provider IHS Markit in London. According to the current data, almost all sub-indices contributed to pushing the main index upwards. “It makes us and our buyers optimistic that the EMI has been able to grow for the second consecutive month. However, in view of the coronavirus epidemic, which is also spreading in Europe, we must wait and see how it develops,” 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. “Despite the first corona cases in China, the EMI continued to recover in February. However, a setback is to be expected for March,” commented Dr. Gertrud R. Traud, Chief Economist at Helaba Landesbank Hessen-Thüringen, in response to a BME inquiry about the current EMI data. The virus has now arrived in Europe. “It can be assumed that there will be production restrictions, failure of supply chains, less air traffic, postponement of events and the like. This will put the brakes on the national product and the mood of companies. If we succeed in getting the coronavirus under control soon, the setbacks would only be short-term,” added the Helaba Bank Director. “Survey data may be the most up-to-date data on the real economy; however, in view of the extremely high dynamics, survey data cannot keep up,” Dr. Ulrich Kater, Chief Economist of DekaBank, told the BME. In this respect, he added, the effects of the spillover of the coronavirus on Europe are not yet included in the figures. “All in all, 2020 could develop into a very difficult year for Germany. The Federal Republic already has to bear the brunt of the automotive industry and its spillover effects, the threatened trade conflict with the USA and the still unresolved danger of hard brexite. Now the coronavirus is added to this,” concluded Kater.

“Not least the effects of the coronavirus are already leading to a decline in new orders from abroad and worsening business prospects for companies. The continuing declines in production, new orders or employment – even if they have currently slowed down – show just how thin the German economy is skating on thin ice," Katharina Huhn, Head of the Department for Economic Situation, Growth and Company Surveys in the DIHK, the German Chambers of Industry and Commerce, told the BME. In an already weakened economic situation in Germany, the further spread of the coronavirus threatens to become a real economic inhibitor. Huhn: “The improvement of the main index should also be treated with caution because the extension of delivery times, due to failures in China, has a positive effect in the calculation.” Commenting on 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: “The most important listed raw material prices recently fell as a result of the economic slowdown caused by the corona virus. On the European market, however, steel and steel scrap prices rose again. China's steel production is expected to fall below the previous year's level after the current production interruptions. Only around 65 percent of steel production capacities are currently fully available there. Supply chains are also disrupted due to logistics problems on the input and output side. As China is currently reducing its exports to Asia and the Gulf region, Turkey is having a greater impact here. This reduces Turkish export pressure on the continental European market. IKB therefore expects a further slight increase in steel prices in the second quarter.”

Overview of the development of the EMI sub-indices

Industrial production: The decline in production slowed again and was as small as last seen in February 2019, with data showing moderate contraction rates for all three industrial sub-sectors covered by the survey (consumer, intermediate and capital goods). The strongest decline was in the capital goods sector.

Total new orders/Exports: The sub-index new orders approached a stable level in February and signalled only a marginal minus. Moreover, the fifth consecutive increase (from a ten-year low last September) pushed the seasonally adjusted sub-index to its highest level in the seventeen-month period of contraction. Some respondents reported that the strengthening of domestic demand cushioned the decline in exports.

German manufacturers saw an accelerated decline in export orders in February. After decelerating in five of the past six months, the contraction has now reached its highest level since November 2019. A large number of respondents attributed this to the outbreak of the coronavirus in China and the resulting slump in demand. The survey results show that new orders from abroad declined in all three sub-sectors, led by the capital goods sector.

Employment: The low level of capacity utilisation in production in many places and the reduction of temporary workers caused employment levels to fall in February as well. This means that job cuts have now continued for exactly one year. Although still above the average for the twelve-month period of decline, the decline has currently weakened somewhat. This was mainly due to the recent increase – albeit modest – in employment in the consumer goods sector.

Purchase/sales prices: In February, the decline in purchase prices eased for the third time in a row after a 3.5-year low in November 2019. The seasonally adjusted sub-index was at its highest level since June last year, although around 20 percent of survey participants still reported a reduction. In particular, metals (especially steel), natural gas and plastics were cheaper than recently. In addition, suppliers' pricing power was generally considered to be weaker.

Selling prices fell for the eighth consecutive month in February. In the current fierce competition for orders, many manufacturers passed on their cost savings to their customers in the form of price discounts. The rate of decline remained unchanged compared to the previous month and was one of the strongest in the past ten years.

Annual outlook: In February, Germany's manufacturers remained cautiously optimistic about their production levels within the year. The corresponding sub-index fell slightly from the 17-month high in January, almost entirely due to concerns and uncertainty surrounding the coronavirus epidemic. Nevertheless, the sub-index was still at its second highest level in a year and a half. Confidence was fuelled by the prospect of increased investment and rising demand.

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).