EMI: Industry also unstable in November

The IHS Markit/BME-Einkaufsmanager-Index (EMI) rose by 2.0 points to 44.1 in November compared to the previous month. Despite this slight improvement, the German PMI remains clearly in the red zone. The important leading indicator for the development of the manufacturing industry in Germany is already moving below the magical 50 point reference line for the eleventh month in a row, above which economic growth is signalled.

German industry shrank again in November. However, the minus has weakened, the English financial services provider IHS Markit announced in London. The declines in production, new orders and employment were all smaller than in the previous months. In addition, the manufacturers' business outlook was positive again for the first time. Furthermore, the data show that the pressure on sales prices is continuing. This is mainly due to the sharp fall in purchasing prices and the increasingly fierce competition for new orders. The seasonally adjusted IHS Markit/BME Purchasing Managers Index (EMI) climbed to 44.1 points in November after 42.1 points in October. Even though this is the best figure since June, the EMI is still clearly negative.

“The current EMI data show a glimmer of hope. After all, the German PMI climbed to a five-month high in November,” stressed BME Managing Director Dr. Silvius Grobosch in Eschborn. Nevertheless, it remains to be seen whether a trend reversal is already on the horizon or whether the weakness of the manufacturing sector will persist. “The EMI and the German economy are still struggling. It is therefore highly probable that the new President of the European Central Bank, Christine Lagarde, as one of her first official acts, will cut interest rates a little further into the negative range,” commented Dr. Gertrud R. Traud, Chief Economist at Helaba Landesbank Hessen-Thüringen, on the current EMI data in response to a BME request. But this should be it then, since the negative effects of this monetary policy are becoming more and more obvious and the ECB, in its role as a supervisory institution, is increasingly pointing out this fact. The Helaba Bank Director added: “It is not the monetary policy, but the trade policy of Trump and Xi or a ceasefire in the trade war that should be the reason for a gradual stabilisation of the world economy in the coming year.”

“In terms of the economy as a whole, we have probably narrowly escaped a technical recession, above all thanks to increasing consumption by private households and the public sector. But this does not mean the all-clear, because as the figures show, the industrial sector continues to be extremely tough,” said Dr Ulrich Kater, Chief Economist at DekaBank. “The second improvement in a row is a sign of hope for German industry. Even though the business prospects for industrial companies are slightly positive for the first time in five months, the overall situation remains tense,” Katharina Huhn, Head of the Business Cycles, Growth and Corporate Surveys Department at the DIHK, told the BME. There was currently no end in sight to the foreign trade challenges. This put pressure on the strongly export-oriented German economy. Competition for new orders remained fierce and production in Germany was falling due to the declining order situation. In the current DIHK survey, more German companies than ever since the last economic and financial crisis cited sluggish foreign demand as a risk for future business development. “In view of the structural challenges facing the German economy, we must work intensively on sustainable improvements concerning our location. Priorities must be set here. An important signal would be an internationally competitive corporate tax burden of no more than 25 percent,” emphasized the DIHK economic expert in her statement for the BME. 

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: “Despite the first signs of an economic recovery after the turn of the year, commodity prices are still at a low level. However, there are also indications of upward changes, even in the steel sector. German steel scrap prices rose by around ten percent as early as November 2019 as a result of scarce availability. In the North American market, prices for rolled steel rose at the beginning of the past month; the Chinese domestic market followed in the following weeks of November. This could also have an effect on the European price level. However, we do not expect a sustained recovery until the first quarter of 2020.”   The development of the EMI sub-indices at a glance:

Industrial production: In November, manufacturing output declined for the tenth month in a row, which a majority of survey participants attributed to the declining number of new orders and the shrinking order backlog. After all, the rate of decline weakened for the second month in a row and was lower than at any time since August.

Total New Orders/Exports: The seasonally adjusted sub-index New Orders was below the 50 point growth threshold for the 14th consecutive month in November. According to the respondents, demand from both domestic and foreign customers declined. The main reasons for this were the still tense geopolitical situation, economic uncertainties and the weakness of the automotive sector. However, the subindex again improved from its near 10.5-year low in September, signaling the smallest drop since January of this year. 

The decline in export orders weakened for the third time in the past four months, indicating the smallest decline since January. Nonetheless, the decline was still substantial, with over a quarter of respondents reporting a reduction in foreign orders. As some purchasing managers reported, demand from Asia in particular declined.

Employment: In the manufacturing sector, more jobs were cut than new ones were created, meaning that job cuts have been continuing for nine months now – the longest phase since the 2008–2010 period. Although the seasonally adjusted sub-index again remained well below the reference line of 50 points, it improved to its best level since August compared with the near ten-year low in October. According to some survey participants, lower factory utilisation and austerity measures were the main reasons for the recent reduction.

Purchasing/sales prices: Purchasing prices fell more sharply in November than at any time since March 2016. Many of the managers surveyed reported lower prices for metals (especially steel). Price reductions were also reported for chemicals and plastics. The price reductions were mostly due to oversupply of the respective materials and growing competition among suppliers. 

The survey results showed once again that sales prices also continued to fall as low demand forced many manufacturers more or less to pass on part of their cost savings to customers due to lower purchasing prices. Despite a slight weakening compared to the previous month, it was still the second strongest rate of decline in the past ten years.

Outlook for the year: The business outlook for industrial companies has brightened considerably. For the first time in five months, the corresponding sub-index is now trading above the threshold of 50 points – albeit only by a narrow margin. Well-known problems such as trade wars, a weakening domestic economy and Brexit continue to cause purchasing managers headaches. Nevertheless, the proportion of respondents who are pessimistic about the future has fallen significantly from 31 percent to 20 percent. Meanwhile, 21 percent expect growth after 19 percent in the previous month.

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 representatives of the German economy by sector, size and region). The EMI is modelled on the US-Purchasing Manager's Index (Markit U.S.-PMI).