Manufacturing sector ends 2020 with further strong growth

Latest PMI survey data showed Germany's manufacturing sector still growing strongly in December, as it continued to recover from the shutdowns induced by the coronavirus disease 2019 (COVID-19) pandemic earlier in 2020. Production continued to rise, albeit at a slightly reduced rate, while goods producers reported strong optimism towards the year-ahead outlook.  Less positively, however, factory workforce numbers remained in decline, while increased strain on manufacturing supply chains led to a sharp rise in cost pressures. December saw the headline IHS Markit/BME Germany Manufacturing PMI® – a weighted aggregate of measures of new orders, output, employment, suppliers' delivery times and stock of purchases – tick up from 57.8 in November to 58.3, its highest since February 2018.  The latest result was indicative of a rapid improvement in manufacturing conditions, which reflected sustained strong increases in both output and new orders. However, it was a sharp drop in the supplier delivery times sub-component (which is inverted for the calculation of the PMI) that led to December's improved reading, alongside a slower decline in stocks of purchases. New order growth was unchanged since November and remained among the quickest seen since data collection began in April 1996. Surveyed firms commented on greater demand from clients both at home and abroad, with Asia (and particularly China) often mentioned as a source of higher sales. New export orders did, however, show the smallest rise for four months, which in part reflected an increased drag from falling foreign demand for consumer goods. Consumer goods was again the weakestperforming category overall in December, recording a fractional decline in output. Total manufacturing production levels continued to rise strongly – albeit with the respective index at a four-month low – thanks to sustained sharp growth in the intermediate and investment goods categories.  Goods producers reported higher backlogs of work for the sixth month in a row in December. Still, payroll numbers continued to be reduced, and at a slightly quicker rate than recorded in the previous survey period. Purchasing activity among manufacturers, by contrast, continued to rise sharply during the final month of 2020. In line with growing demand for inputs, latest data showed increased strain on supply chains. Input leads times lengthened to one of the greatest extents in the survey's near 25-year history, the deterioration nearly matching that seen during the initial COVID lockdowns in April. There were widespread reports of shortages of raw materials and components, bottlenecks in sea freight due to a lack of available containers and other COVID-related disruption.  This increased supply-side pressure was reflected in a sharp acceleration in the rate of input cost inflation faced by German manufacturers to the highest for just over two years. Metals were often reported as up price, as were chemicals and plastics. Average factory gates also rose at a faster rate in December, increasing to the greatest extent since March 2019.  Looking ahead to prospects for 2021, December's survey showed high expectations among manufacturers for output in the coming year. The degree of optimism, though down slightly from November's near-record high, was still historically strong. Many firms were hopeful that the pandemic's impact on economic activity would diminish, and that clients' appetite for investment spending would continue to recover.