EMI: Industrial production is recovering only slowly

The IHS Markit/BME Purchasing Managers Index (EMI) fell by 0.4 points in December 2019 to 43.7 compared to the previous month. Thus, the German PMI remained clearly in the red in the last month of the past year. The important leading indicator for the development of the manufacturing industry in Germany has been moving continuously since January 2019 below the magic 50-point reference line, which signals economic growth.

The manufacturing industry in Germany ended the year 2019 in the deep red. The only positive ray of hope were the new orders, the English financial services provider IHS Markit announced in London. These did not shrink as slightly as in the entire year before. In addition, the business outlook improved – albeit only minimally.

The seasonally adjusted IHS Markit/BME Purchasing Managers' Index (EMI) fell slightly in December 2019 to 43.7 points from its five-month high of 44.1 in November. This means that the current value is below the average for the contraction phase that began in January 2019. The decline continued in all three main sectors of industry, with manufacturers of capital goods delivering the worst performance, followed by manufacturers of intermediate goods. Only in the consumer goods sector did the contraction rate weaken somewhat.

“According to the latest EMI December data, the hoped-for turnaround in industrial production is still a long way off. However, we are hopeful that the business prospects of manufacturing companies have recently brightened up,” emphasized BME CEO Dr. Silvius Grobosch in Eschborn on Tuesday.

“2019 was not a good year for German industry. The first signs of recovery are emerging, but only very gradually,” commented Dr. Gertrud R. Traud, Chief Economist at Helaba Landesbank Hessen-Thüringen, on Tuesday in response to a BME inquiry about the current EMI data. Nevertheless, the prospects for 2020 are significantly better. An end to the brexite drama is foreseeable and obviously the USA and China are planning a trade agreement. It is not yet certain to what extent there will be actual tariff reductions. “However, US President Donald Trump will have to come up with positive data in the course of this year in order to improve his election chances. German industry should then also benefit from this,” added the Helaba Bank Director.

“The old year does not really close on a conciliatory note for German companies. German industry is not yet out of the woods. Fortunately, the downturn is easing somewhat and the domestic economy remains strong,” Dr. Ulrich Kater, Chief Economist of DekaBank, told the BME on Tuesday.

“Even in the reverberations of 2019, German industry continues to write many figures in red pencil. Production, employment and prices are still falling,” Katharina Huhn, Head of the Department for Economiy, Growth and Company Surveys at the DIHK, told the BME on Tuesday. However, the decline in new orders is slowing down and so there is hope for stabilisation. A spread of the industrial recession to service providers and the construction industry is therefore unlikely. “Together with the prospect of an economic recovery, the business prospects are thus improving for the second time in a row, even if only slightly,” emphasised the DIHK economic expert in her statement for the BME.

With regard to the latest development of the EMI sub-index of purchasing prices, Dr Heinz-Jürgen Büchner, Managing Director Industrials, Automotive & Services of IKB Deutsche Industriebank AG, told the BME on Tuesday: “The current escalation in the Middle East conflict could very quickly lead to an increase in crude oil prices of up to USD 80 per barrel of Brent despite of the still good supply situation. Even higher prices are possible if the production possibilities of a large deposit are lost. However, consequently, price declines for listed industrial raw materials would be induced due to the feared negative effects on the global economy. This would compensate for the partial increase in prices since December 2019, for example for scrap”.

Overview of the development of the EMI sub-indices:

Industrial production: In December 2019, production in Germany's manufacturing sector was again significantly reduced. The decline even accelerated compared with the previous month, which means that the current index value is above the average of the eleven-month contraction phase. The latest decline was spread across all sub-sectors of industry and, according to some survey participants, reflected above all the weak order intake. Total order intake/exports: The ongoing uncertainties in world trade combined with the hesitant propensity to invest again resulted in a decline in order intake. After all, the corresponding sub-index improved for the third time in a row and was at its best in the past year. Manufacturers of capital goods registered the most significant decline, followed by the intermediate goods sector. Only in the consumer goods sector was there a slight decline in new orders.

Although the seasonally adjusted sub-index for new orders for exports remained below the growth threshold of 50.0 points for the 16th time in December 2019, it continued its upward trend and climbed to its highest value since January. Many survey participants again complained about the sluggish demand on the global markets and the reluctance to invest. However, some companies were pleased to receive new orders, especially from China, Turkey and the USA.

Employment: The seasonally adjusted sub-index signalled a stronger reduction in jobs in the manufacturing sector than recently. Accordingly, the decline in the last month of the year was one of the strongest in the past ten years. Most of the companies surveyed stated that they had adjusted their headcount to the current weak level of demand. Capital goods manufacturers reported the sharpest decline, followed by companies in the intermediate goods sector.

Purchase/sales prices: As in the past eight months, purchase prices in industry continued to fall in December 2019, with the rate of decline remaining close to the peak level of the last three and a half years and thus at a significant level. Among the materials that became cheaper were metals (especially steel), plastics and wood products.

Manufacturers' pricing power remained limited at the end of the year. Sales prices were cut for the sixth month in a row, mostly to maintain existing orders or to win new ones. However, the reduction weakened slightly for the second time in a row and was as small as last seen in August 2019. While companies in the intermediate goods sector recorded a price decline, manufacturers of consumer goods increased their prices.

Annual outlook: In December, the sub-index climbed to its highest level since September 2018, thus moving further away from the record low in August. Nonetheless, the number of companies that expect production to rise within the year is only slightly higher than the number that expect further business losses. Uncertainties relating to trade conflicts, the global economic outlook and brexite continued to weigh on expectations.

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/managing directors in 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).