EMI falls to 18-month low in March due to Ukraine war

Latest S&P Global/BME Purchasing Managers Index (EMI): Slower rises in output and new orders as export sales fall +++ Input cost inflation accelerates amid fresh supply disruption +++ Business expectations sink to lowest since May 2020 +++

Germany's manufacturers reported a slowdown in growth and a marked drop in their expectations towards future activity in March as the war in Ukraine weighed on export demand and led to fresh supply-side pressures, latest PMI survey data showed. After easing in recent months, supply delays worsened and there was a reacceleration in the rate of input price inflation. For the first time since the initial global COVID outbreak, goods producers were pessimistic about the year-ahead outlook. The slowdown in growth in March was underscored by the seasonally adjusted S&P Global / BME Germany Manufacturing Purchasing Managers’ Index (PMI) – a weighted aggregate of measures of new orders, output, employment, suppliers' delivery times and stocks of purchases – slipping to an 18-month low of 56.9, down from 58.4 in February. Inflows of new orders at German manufacturers rose at the weakest rate for three months. The principal factor behind the slowdown was a decline in export demand, which reports from surveyed businesses linked to the war in Ukraine and the subsequence sanctions placed on Russia and Belarus. As well as impacting demand, Russia's invasion of Ukraine led to renewed pressure on supply chains at the end of the first quarter. After easing in each of the previous four months, the incidence of delays increased to the highest since November last year. There were also reports that long-standing challenges around material availability and transportation had been exacerbated by rising COVID cases in China. Alongside still-elevated levels of COVIDrelated staff absences, the combination of falling export demand and worsening product shortages resulted in a slower rise in manufacturing output levels in March. The rate of production growth eased for the second month running to the weakest since December last year. Manufacturers continued to report challenges around capacity, and as such took on additional staff during March. The rate of job creation was solid but eased to a four-month low, as firms reported the slowest build-up of backlogs since August 2020. Goods producers' recent efforts to build up buffer stocks of inputs continued in March, as reflected in a robust rise in purchases of materials and semi-finished goods. That said, the rate of growth was the weakest for 19 months, which dragged on stockpiling abilities as inputs stored in warehouses rose at a slower pace. By contrast, postproduction inventories showed the steepest rise since May 2020, linked in part to difficulties dispatching orders and last-minute cancellations. Elsewhere, a surge in the prices of oil, gas and other commodities that resulted from the Russian invasion of Ukraine led to an uptick in the rate of input cost inflation for the first time in five months. In turn, there was a faster rise in average factory gate prices, with the rate of increase registering close to last November's series-record high. Concerns about the potential for persistent strong inflationary pressures, continued supply chain disruption, and a weakening of demand contributed to a substantial drop in manufacturers' expectations, and one that was second only to that seen during the initial global outbreak of COVID-19. Business confidence was at its lowest since May 2020.