EMI: Supply bottlenecks slow down production and new orders also in September
Smallest gains in production and new orders in 15 months +++ Raw material shortages drive higher costs and selling prices +++ Job creation slows as business outlook falls to 13-month low
The manufacturing sector in Germany continued to suffer from widespread supply bottlenecks in September. Numerous manufacturers reported not only lower production levels but also weaker order intake, as the curbing of production in the automotive sector and rising prices continued to depress demand. This was confirmed by the seasonally adjusted IHS Markit/BME Purchasing Managers' Index (EMI), which slipped noticeably for the second month in a row. The important leading indicator for Europe's largest economy not only stood at an 8-month low of 58.4 points in September, but also more than four points below the August value (62.6).
"Ongoing material shortages and related supply chain disruptions severely affected industrial production in September. We are also observing with concern that the existing supply bottlenecks are driving purchasing prices ever higher," emphasised Gundula Ullah, Chairwoman of the Executive Board of the German Association for Supply Chain Management, Procurement and Logistics (BME) in Eschborn. "In view of the further deteriorating business outlook in the industry, it is to be feared that the supply bottlenecks could continue into next year. This is also signalled by our current BME member surveys," Ms Ullah concluded.
"The mood in German industry is clearly clouding over, even if it is still in the expansionary range," commented Dr. Gertrud R. Traud, chief economist at Helaba Landesbank Hessen-Thüringen, on the current EMI data in response to a BME query. If one looks at the reasons, it becomes clear that this change in sentiment is quite different from that of previous years: "It is not demand that is slowing down growth, but supply! So it is not surprising that prices are rising and delivery times are getting longer and longer. The positive aspect of this scenario is that the order situation will last well into next year. An end to the upswing is not yet in sight. But the negative for both companies and consumers is that the shortages are both squeezing margins and further inflating consumer prices. It is time for policymakers to realise that supply-side measures are now necessary. Keynesian instruments have had their day," the Helaba bank director added in her statement for BME.
"All signs point to an economic slowdown in the fourth quarter," Dr Ulrich Kater, chief economist at DekaBank, told BME. The survey indicators are forming a downward trend or - as in the case of the ifo business climate - have already started to do so. The burdens caused by bottlenecks in primary products, raw materials and transport capacities have not diminished and will probably persist for longer than feared so far. Kater: "The consequence is a series of downward revisions of economic forecasts. But the fact remains that this is a dip in the economy and not a downward trend leading to a recession."
"Persistent supply bottlenecks and price increases for raw materials, intermediate products and energy are weighing on the economic recovery. In the latest DIHK survey on supply bottlenecks and shortages of raw materials, nine out of ten companies reported rising purchase prices also due to supply shortages," DIHK economic expert Jupp Zenzen told BME. More than a quarter of the companies were forced to reduce or even stop their production; 42 per cent were unable to process existing orders due to material shortages. Zenzen: "This is reflected in lower value added, especially in the manufacturing sector. Most companies do not expect supply chains to return to normal until next year.
Dr Heinz-Jürgen Büchner, Managing Director Industrials, Automotive & Services at IKB Deutsche Industriebank AG, told BME about the latest development of the EMI sub-index for purchasing prices: "There is still no significant easing on the commodity markets. Although there have been slight price corrections for steel, supply bottlenecks continue to dominate for many products. In the case of steel, it could help that ThyssenKrupp has put another blast furnace into operation after three months of maintenance. Gas supply is also tight. In Germany, for example, the gas storage facilities are currently only filled to a very low level, which is also driving up prices. The first deliveries via the Nord Stream 2 pipeline could ease the situation. So despite chip shortages and resulting production interruptions in the automotive industry, commodity prices continue to move at a high level."
The development of the EMI sub-indices at a glance:
Production: production growth continued to weaken in September. The seasonally adjusted sub-index declined for the fifth time in the past six months and reached its lowest level since the return to growth in July 2020. According to survey participants, material bottlenecks continue to slow down production the most.
New orders: Growth in new orders also slowed almost dramatically, plunging to the lowest level in the fifteen-month expansion phase. The main factor here was the decline in demand in the intermediate goods sector, which was often linked to forced production interruptions in the automotive sector. In the consumer and capital goods sectors, new orders were more solid, but also weaker than recently.
New export orders: The seasonally adjusted export orders sub-index continued its almost uninterrupted downward trend in September from the record high in March. Although it is still well above the reference line of 50.0 points, it has now reached its lowest level since August 2020. Contrary to the general trend, global demand for consumer goods "Made in Germany" picked up again.
Business expectations: German manufacturers were less optimistic in September than at any time since August last year. Although confidence is still higher compared to the pre-pandemic situation, it ranks well below the June peak after the third consecutive slowdown. Hopes for a sustained recovery in demand in the coming year were at least partly outweighed by concerns about chronic material shortages.
Employment: As in the previous seven months, employment in industry rose in September. The rate of increase weakened further from the record high in July and was the slowest since March. Job creation slowed in all three sub-sectors covered by the survey.
Purchase prices: Cost pressures in the manufacturing sector remain extremely high at the end of the third quarter. Although the inflation rate eased to a 5-month low, it was still one of the highest since this data was collected. Aluminium, electronic components, packaging, plastics and steel were among the items most frequently reported as more expensive. In addition, freight costs also rose again.
Selling prices: Many manufacturers passed on higher costs to their customers, which was reflected in another sharp increase in sales prices in September. The seasonally adjusted sub-index even increased slightly from the previous month, moving back closer to July's all-time high.
About the EMI: The IHS Markit/BME Purchasing Managers' Index (EMI) provides a general overview of the economic situation in German industry. It is a snapshot of the business situation in manufacturing - calculated from the sub-indices for new orders, production, employment, delivery times and stocks of input materials. The index has been published under the auspices of the BME since 1996. It is compiled by IHS Markit, a provider of business, financial and economic information headquartered in London, and is based on a survey of 500 purchasing managers and managing directors in the manufacturing industry in Germany (selected to be representative of the German economy by sector, size and region). The EMI is modelled on the US Purchasing Managers' Index (Markit U.S. PMI).