EMI: Industrial production weakened again in April

At 44.4, the IHS Markit/BME-Einkaufsmanager-Index moved close to the 80-month low of March in the month under review. The production rate again fell sharply in April, albeit somewhat more slowly than four weeks earlier.

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In contrast to the strongly expanding service sector, industrial production in Germany remains low in the shrinking zone. This is shown by the current survey results of the IHS Markit/BME-Einkaufsmanager-Index (EMI) for the month of April: At 44.4 points, the important leading indicator for the manufacturing sector in Germany improved slightly compared to March (44.1 points); nevertheless, the PMI is below the growth threshold of 50.0 points for the fourth month in a row, according to the English financial services provider IHS Markit.

“Despite the EMI data, which is once again only mixed, we are confident that the German industrial sector will soon start to grow again. Where the 2019 journey will ultimately take us, however, will only be determined by the figures from the next preliminary estimate at the end of May," 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) on Monday in Eschborn.

“The mood in Germany is good - at least among consumers and in the construction sector. In industry, the situation is different, even though the latest EMI was slightly higher than in the previous month," said Dr. Gertrud R. Traud, Chief Economist at Helaba Landesbank Hessen-Thüringen, commenting on the current EMI data on Monday in response to a BME request. The manufacturing sector is currently particularly weak, for which the automotive sector is particularly responsible – showing how quickly a strength can become a weakness. “But there are glimmers of hope. The strong economic impulses in China, continued growth in the USA and recovery tendencies among our immediate neighbours with continued strong demand in the service sectors should also soon help German industry to take off again,” said the Helaba Bank Director.

Dr Ulrich Kater, Chief Economist at DekaBank: “The current data once again show the problems facing German industry, which are ultimately weighing on the economy as a whole. These are a general industrial weakness in the global economy as well as the known problems ranging from the still unresolved Brexit to the special issues of the automotive industry.” In his opinion, however, things do not look too bad: The hard data pointed to intact growth in the first and second quarters thanks to strong domestic economic activity.

DIHK foreign trade expert Kevin Heidenreich: “Industry continues to lose strength. The renewed decline in incoming orders is causing uncertainty among companies about their future business.” In addition, there are international trade disputes and the Brexit. “Companies must therefore be relieved of too high taxes and too much bureaucracy sooner rather than too late. This supports the economy and helps companies in a global comparison.”

Dr. Heinz-Jürgen Büchner, Managing Director Industrials, Automotive & Services at IKB Deutsche Industriebank AG: “Currently, crude oil prices are causing high volatility. Prices had already risen slightly at the beginning of April. The announcement by the USA not to extend the permits for Iranian crude oil granted so far and scheduled to expire in May 2019 caused crude oil prices to rise sharply.” The situation had calmed down somewhat after President Trump announced that Saudi Arabia was prepared to close the gap at short notice. The supply embargo would affect China, India, Turkey and South Korea in particular. “For its part, the Iranian government recently threatened to block the Strait of Hormus, the most important sea supply route from the Gulf region. Against the backdrop of the current further decline in crude oil production in Venezuela - which is now only a good third of the 2017 level - this would endanger the oil supply.” Therefore, a crude oil price of between USD 70 and 75 per barrel of Brent can be expected by mid-2019. If the Strait of Hormus were to be temporarily closed, the price of crude oil would have further potential for increase in the short term.

The development of the EMI sub-indices:

Industrial production: The April data signal the third consecutive decline in the production level of German manufacturers. Although the output subindex improved somewhat from its 80-month low in March, it nevertheless remained clearly in the loss zone. Companies that recorded a minus attributed this to weak demand, especially from the automotive sector.

Total Order Intake/Exports:
Once again, industrial companies suffered a significant drop in order intake. Although the rate recovered somewhat compared to the previous month, it still remained the second-worst rate for more than ten years. This means that new orders from global players and SMEs have been shrinking for seven months now. The strongest decline was recorded by producers of capital goods.

The declining demand from abroad also continues to be characteristic of the EMI survey. In April, the eighth consecutive minus was recorded, which was again strong and only slightly above the ten-year record set in March. The tumbling automotive industry was once again cited by many EMI survey participants as the main reason for the decline. Lower sales figures were recorded in China, the USA and some European countries, among others.

Employment: As in March, employment in the German industrial sector shrank minimally in April. The decline resulted primarily from the fact that fixed-term contracts and temporary workers were not renewed. However, there were also sporadic reports of dismissals and vacancies of retired employees. The reduction in headcount is mainly concentrated in the area of intermediate inputs and capital goods.

Purchase/sale prices: Cost pressure remained subdued at the beginning of the second quarter. The seasonally adjusted sub-index of purchase prices remained virtually unchanged compared with the 32-month low in March and thus remained well below its long-term average of 56.0 points. The rise in oil prices and wages was largely overcompensated by the fall in the price of raw materials – especially steel. In addition, some EMI survey participants reported that they had successfully negotiated lower prices due to the low level of demand.

Due to the currently weak cost pressure and the continuing decline in the number of new orders, companies were more cautious in their pricing in April. Average producer prices therefore rose only moderately and at the lowest rate since November 2016. While prices in the consumer goods sector rose sharply, they even fell in the intermediate goods and capital goods sectors.

Outlook for the year: The April EMI survey results show once again that business prospects in the manufacturing sector remain rather bleak. The subindex annual outlook slipped further below the neutral reference line of 50 points and signaled the strongest pessimism since November 2012. Purchasing managers continue to be most concerned about the stumbling automotive industry, the Brexit and the ongoing international trade disputes.

About the EMI: The IHS Markit/BME-Einkaufsmanager-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 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).

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