EMI: Industrial production slumped dramatically in July
The IHS Markit/BME-Einkaufsmanager-Index (EMI) fell again significantly in the month under review to 43.2 points from June, a seven-year low.
The sharp decline in incoming orders, especially in the export business, caused the manufacturing sector in Germany to shrink more sharply in July than at any time before in seven years. This is shown by the current survey results of the IHS Markit/BME-Einkaufsmanager-Index (EMI). With 43.2 points after 45.0 in June, the PMI currently slid even lower into the red zone. At the same time, the important leading indicator for industrial production in Europe's largest economy is already below the growth threshold of 50.0 points for the seventh month in a row, according to the English financial services provider IHS Markit in London.
“The situation of the German economy is deteriorating noticeably. This is confirmed by the current PMI data,” said Dr. Silvius Grobosch, Managing Director of the Bundesverband Materialwirtschaft, Einkauf und Logistik e.V. (Association for Supply Chain Management, Procurement and Logistics, BME) in Eschborn on Tuesday. It was to be hoped that the continued solid growth of the service sector would at least be able to slow down, if not stop, the continuing decline of the industry.
“According to the EMI, the downward trend in German industry continued in July. It can be assumed that, in addition to structural issues, the trade dispute between the USA and China in particular is also leaving its mark in Germany,” commented Dr. Gertrud R. Traud, Chief Economist at Helaba Landesbank Hessen-Thüringen, on Tuesday at the request of BME on the current EMI data. If this continues, there is a high probability that the recessionary tendencies in industry will be intensified. "Trump has got us in his hands," the Helaba bank director concluded.
“Germany is being hit hard by the collateral damage caused by global trade disputes. Although Europe is not the focus of these disputes, German industry is suffering from the global fallout”, Dr Ulrich Kater, Chief Economist at DekaBank, told the BME on Tuesday. Companies around the world were downgrading their investment plans, and German industry was feeling the effects on a massive scale. The German economy was highly dependent on exports, with a focus on capital goods and a strong focus on the USA and China.
“The foreign trade environment is becoming rougher for German companies. More and more trade barriers, the Brexit or sanctions increase the uncertainties for local companies”, DIHK foreign trade expert Kevin Heidenreich told the BME on Tuesday. The export expectations are as low as they have not been for ten years. This has also had a negative impact on the investment and employment intentions of companies. There is currently no end in sight to the foreign trade challenges. This puts pressure on the strongly export-oriented German economy. Heidenreich continued: “Companies in this country therefore need a tailwind for more investment and innovation: These include a reduction in bureaucracy, faster expansion of the transport and IT infrastructure and a corporate tax reform.”
On Tuesday, 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 purchase prices: “President Trump's current announcement to impose further penalties on Chinese imports is likely to exert additional pressure on commodity prices and affect them differently. We therefore see only limited potential for steel prices to fall further.” Since the beginning of the year, iron ore prices on the spot market have risen by around two thirds, which, according to Büchner, should also lead to correspondingly higher contract prices. “This should at least result in stable to slightly rising European steel prices. The further development of crude oil quotations, on the other hand, depends primarily on the effects of the US naval mission and allied states in the Strait of Hormus. The current production level ensures largely stable prices. A strong military strike could lead to costs of up to 80 US dollars per barrel of Brent”, concludes Büchner.
The development of the EMI sub-indices at a glance:
Industrial production: The production growth rate fell for the sixth time in a row in July. In addition, the decline accelerated compared to the previous month and was the second-strongest in the past seven years (just behind that of March 2019). A breakdown of the data by sub-sector showed that output in the intermediate goods and capital goods sectors shrank significantly. Manufacturers of consumer goods once again resisted the downward trend and recorded strong growth.
Total order intake/exports: German manufacturers again recorded a drop in order intake in July, which the survey participants justified with delayed decisions, tougher competition and fundamentally lower demand. Many of the managers surveyed also cited the automotive industry as a particular weak point. After slowing over the course of the second quarter, the rate of decline accelerated to its worst level since April. The sub-sectors showed the same development as production.
The renewed deterioration at the beginning of the third quarter was at least partly due to the sharp and accelerated decline in export orders. The corresponding seasonally adjusted sub-index fell sharply compared with the previous month and was at its lowest level for more than a decade. As some survey participants stated, sales in Europe, but above all in China, declined noticeably. And here, too, the weak automotive sector was often cited.
Employment: The downward trends in production and new orders also had an impact on employment, as many companies sought to reduce overcapacities. For the fifth month in a row, a decline in the number of employees was registered, which even accelerated compared with the previous month and was as strong as seven years ago. Survey participants who reported a lower number of employees often indicated that they had not extended fixed-term contracts or filled vacancies with colleagues who had retired due to age.
Purchasing/sales prices: According to the responses of some survey participants, competition between suppliers is intensifying. In addition, the number of buyer markets for materials and parts is growing. Average purchase prices fell for the third month in a row and at the highest rate since April 2016. Lower-priced items included chemicals, plastics, steel and steel products.
The combination of growing competitive pressure and falling purchase prices prompted German manufacturers to lower their selling prices in July for the first time in almost three years. The current trend is thus in stark contrast to the strong inflation rates registered around this time in 2018. The slight overall decline is largely due to price discounts granted by producers of intermediate goods and capital goods. Although the consumer goods sector recorded an increase, it was significantly lower than in June.
Outlook for the year: At the beginning of the third quarter, the hint of optimism on the part of purchasing managers from the previous month evaporated again. The business outlook sub-index plummeted and, after its nine-month high in June, signaled the greatest degree of pessimism since October 2012. According to comments from some survey participants, concerns about a weakening of the domestic economy and the global economy are growing. In addition, many respondents have once again commented on the worrying state of the automotive industry and its lack of traction.
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, the London-based provider of business, financial and economic information, and is based on a survey of 500 purchasing managers/managers of 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).