Supply bottlenecks continue to hold back growth

Output growth ticks up as incidence of lengthening input lead times falls +++ Input costs and output prices rise sharply, but rates of inflation ease +++ Faster rise in employment as business expectations strengthen slightly +++

German manufacturing production continued to be held back by supply constraints in December, latest PMI survey data showed. However, with firms recording the lowest incidence of input delivery delays since January 2021, the rate of output growth picked up slightly. This coincided with a partial correction in the rate of cost inflation from recent record highs as well as an improvement in expectations towards future production. Still, conditions on the supply side remained among the toughest seen in the survey's history, leading firms to rapidly build up buffer stocks of inputs during the month. At 57.4 in December, 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 – was unchanged since November and remained at its lowest since January 2021. After having slowed throughout much last year, the rate of manufacturing output growth picked up slightly for the second month in a row in December. That said, it was still subdued compared to the historical average, as a number of firms once again indicated that supply shortages had weighed on output levels. Inflows of new orders at German manufacturers continued to outstrip production volumes, leading to another steep increase in backlogs of work in December. The rate of new order growth lost further momentum, however, easing to its lowest since the current upturn began in July 2020. Reduced production schedules at customers owing to input shortages was a factor, surveyed businesses indicated. The trend in new export orders mirrored that of total new work. Almost half (49%) of firms recorded a lengthening of average lead times on inputs in December. This was down from a survey peak of 79% in May and the lowest since January. However, it was still higher than at any time in the series history prior  to the onset of the pandemic in 2020, with many firms continuing to report imbalances between supply and demand across a range of materials and components, as well as pressure on transport capacity. German manufacturers continued in their efforts to mitigate against supply bottlenecks and long lead times by building up stocks of inputs. Driven by a sustained strong increase in purchasing activity, preproduction inventories rose at a record rate for the second month in a row in December. Stocks of finished goods also increased, albeit only modestly by comparison. On the cost front, goods producers faced another steep rise in average input prices at the end of the fourth quarter. The rate of inflation did however ease slightly and for the fourth time in the past five months, taking it further from July's record high to the lowest since April. It was a similar picture for output prices, the rate of inflation of which remained among the fastest in the series history as many firms looked to pass on higher costs, but eased – and quite notably – compared to November's record high. German manufacturers recorded slightly greater optimism towards the yearahead outlook for output in December. Expectations ticked up further from October's 14-month low to the highest since August, although they were still below the average for the year as a whole. Firms were hopeful of seeing both an easing of supply chain constraints and an improvement in demand over the course of 2022. In line with positive growth projections, goods producers increased employment. Furthermore, the rate of job creation accelerated for the first time in five months and was the quickest since September.