German manufacturing sector remains afflicted

Material shortages restrain output and new orders Surging input costs drive record rise in factory gate charges Further slowdown in job creation as optimism wanes

Supply bottlenecks remained a major hindrance to Germany's manufacturers at the start of the fourth quarter, latest PMI survey data showed. Material shortages were a restraining factor for both output and new orders, while at the same time they underpinned a record increase in factory gate charges as firms looked to pass on sharply rising costs to customers. Trends in employment and expectations also disappointed in October. The rate of job creation slowed for a third straight month, while business optimism slipped to the lowest since August 2020. 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 – registered 57.8 in October, down from 58.4 in September. Though the lowest in nine months, the latest reading remained firmly above the 50.0 no-change mark. However, this once again owed in large part to the suppliers' delivery times sub-component, which continued to boost the index in level terms Supplier delivery times in fact had a positive influence on the headline PMI at the margin in October, with reports of delays having increased for the first time in five months to the highest since July. Surveyed businesses commented on shortages of commodities in the market, capacity constraints among suppliers and transportation issues. Supply constraints held back production levels during October as firms had difficulties sourcing key components. The survey's output index registered its lowest reading in 16 months and was only slightly above the 50.0 no-change mark. It was a similar picture for new orders, which showed the weakest rate of growth since the current recovery began in July 2020. Key to this was a reduction in demand from customers in the automotive sector linked to the ongoing chip crisis. Growth in export orders showed a more robust trend than total new business.   Another headwind to order book growth was higher prices. October saw an unprecedented rise in average prices charged by German manufacturers as an increasing number of firms looked to pass on higher costs to customers. Latest data showed no let-up in the recent surge in costs faced by goods producers. The rate of input price inflation even ticked up slightly in October for the first time in three months, taking it closer to July's record high. Surveyed businesses reported paying more for a range of materials and components, particularly aluminium, electronics, plastic and steel, as well as facing higher energy and freight costs. Manufacturers' purchasing of inputs continued to show a robust rate of growth, and one that was notably quicker than those of output and new orders as a number of firms reported efforts to build up buffer stocks. This contributed to a rise in preproduction inventories for the first time in a year-and-a-half. Stocks of finished goods meanwhile moved closer to stabilisation having fallen in each of the previous 16 months. The upturn in factory employment extended to an eighth straight month in October, reflecting efforts by manufacturers to expand operating capacity. The rate of job creation was solid but eased for the third month running to the slowest since March. Lastly, October's survey showed a further weakening of manufacturers' optimism towards future output. Firms expecting growth over the next 12 months outnumbered those predicting a decline by the smallest margin since August 2020, owing to growing concerns about supply bottlenecks and associated inflationary pressures.