EMI: Industrial production in the red area again in August
The IHS Markit/BME-Einkaufsmanager-Index (EMI) rose slightly from July to 43.5 points in the month under review. Nevertheless, the important economic barometer for the economic situation of the manufacturing sector in Germany remains well below the 50-point reference line, above which growth is signalled.
The downturn in the manufacturing sector in Germany continues. This is shown by the current survey results of the IHS Markit/BME-Einkaufsmanager-Index (EMI). With 43.5 points after 43.2 in July, the PMI is still in the red zone. At the same time, the important leading indicator for industrial production in Europe's largest economy is below the growth threshold of 50.0 points for the eighth month in a row. According to the English financial services provider IHS Markit, the renewed sharp decline in new orders has caused many companies to cut back their production further and to cut their personnel once again.
“Even in August, German industry was unable to stop the slump that had persisted since the beginning of the year. This is confirmed by the current EMI data,” said 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. The negative development of the subindex “Outlook for the Year”, which had plummeted to 39.1 (July: 43.2) points, was also a cause for concern.
“According to the EMI, the mood in German industry remains weak. Both the trade war between the USA and China and the structural changes in Germany are causing problems for the industrial sectors,” said Dr. Gertrud R. Traud, Chief Economist at Helaba Landesbank Hessen-Thüringen, commenting on the current EMI data in response to a BME request. Location issues, tax burdens, regulation, prospects for the future – all of these were marked with a question mark. “The industry is in recession. Thanks to stable services, there is a chance that the economy as a whole will be spared a recession,” the Helaba Bank Director concluded.
“Companies are reluctant to invest due to global trade conflicts and uncertainties surrounding the brexit. Suppliers from Germany are currently feeling this clearly in their order books,” DIHK foreign trade expert Kevin Heidenreich told the BME. The cooling of the global economy is thus having a direct impact on the German economy. But the challenges here in Germany are also numerous: “Companies in Germany, for example, are coming under increasing pressure due to the burden of taxes and bureaucracy. All this leads to poorer business prospects for German companies,” Heidenreich continued.
Dr. Heinz-Jürgen Büchner, Managing Director Industrials, Automotive & Services of IKB Deutsche Industriebank AG, told the BME on the latest development of the EMI sub-index purchasing prices: “Most commodity prices fell in the course of August as a result of the intensifying trade war between the USA and China. The global nickel market was an exception. This market was most recently affected by the Indonesian government's announcement on 30 August 2019 that it would no longer export ores with a pure metal content of less than 1.7 percent from 1 January 2020.” This would lead to a considerable reduction in exports affecting China in particular which would definitely show a supply deficit in 2020. “The global nickel market will even show a supply deficit in 2019. Therefore, the nickel price has the potential to increase, which can also affect the prices for stainless steel via alloy surcharges,” Büchner concluded.
The development of the EMI sub-indices at a glance:
Industrial production: In August, the seasonally adjusted sub-index output was at 45.8 for the seventh consecutive month in the red. Although slightly improved compared to July (44.2), this index signaled another significant decline in production and was roughly at the average value of the current contraction phase. In the sub-sectors, the intermediate goods sector recorded a stronger decline than the capital goods sector for the fourth time in a row, while the consumer goods sector again recorded growth.
Total new orders/Exports: August data show a renewed sharp decline in manufacturers' new orders, with little change in the contraction rate compared to the previous survey period for both large as well as small and medium-sized enterprises. In many cases, survey participants pointed out the reluctance of their customers to place new orders against the backdrop of political and economic uncertainty. Once again, the stumbling automotive industry was particularly highlighted.
The drop in total incoming orders was underpinned by a further drop in foreign demand. The corresponding seasonally adjusted sub-index improved slightly from its ten-year low of 38.2 in the previous month to 40.7, but still showed a strong decline. Export demand thus shrank for the twelfth consecutive month, with the largest drop in the intermediate goods sector.
Employment: The savings in the manufacturing sector were also reflected in employment. In August (45.0), the corresponding seasonally adjusted subindex slipped to its lowest level since July 2012 and thus even lower into the red. A large number of companies reacted not only to the lower production levels, but also to the cooling economy as a whole. In most cases, staff were cut by not renewing fixed-term contracts or by laying off temporary workers.
Purchasing/sales prices: Cost pressure in the manufacturing sector continued to ease in August. Purchasing prices fell for the fourth month in a row and at a rate not seen since March 2016. Some survey participants reported that suppliers granted price discounts, as supply in many cases exceeded demand. Steel was the most frequently cited cheaper material, but aluminium, plastics, solvents and turned parts also became cheaper.
After the first decline in almost three years in the previous month, average selling prices fell again in August. Although the decline accelerated somewhat, it remained moderate overall and much weaker than that of purchasing prices. Most companies that lowered their selling prices pointed to strong competition and falling raw material costs.
Outlook for the year: The survey results show that many manufacturers are more pessimistic about the coming twelve months as the Business Outlook sub-index fell to 39.1, its lowest level since the start of recording this data in mid-2012. By contrast, the number of companies expecting to shrink within a year reached a record high. Similarly, there have never been fewer companies forecasting growth. Those who see the future as less rosy explained this with the slowing economy, trade conflicts, the uncertainty of many customers and the problems in the 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 in 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).