EMI: sharp decline in industry in October

The IHS Markit/BME-Einkaufsmanager-Index (EMI) rose by 0.4 points to 42.1 in October compared to the previous month. However, there is no sign of an all-clear. Despite this slight improvement, the PMI is still close to its ten-year low. At the same time, the important leading indicator for the development of the manufacturing sector in Germany is already moving below the magic 50 point reference line for the tenth month in a row, above which economic growth is signalled.

At the beginning of the fourth quarter, German industry is still suffering. The Brexit crisis, trade conflicts, the cooling of the domestic and global economy and the problems in the automotive industry continue to put pressure on the mood of many industrial companies. This is shown by the current survey results of the IHS Markit/BME-Einkaufsmanager-Index (EMI). The seasonally adjusted PMI – a snapshot of the manufacturing sector in Germany, derived from the indicators for incoming orders, production, employment, delivery times and starting material stocks – rose by 0.4 points in October to 42.1 points compared to the previous month. However, despite this slight improvement, the PMI remains close to the ten-year low reached in June 2009. At the same time, for the tenth month in a row, the important leading indicator for the development of the manufacturing sector in Germany is moving below the magic 50-point reference line from which economic growth is signalled, according to the English financial services provider IHS Markit in London.

As the latest EMI survey results from IHS Markit and BME show, both production and new orders fell again in October, albeit more slowly than recently.

“German industry is still in recession. It is only unclear whether the manufacturing industry has already reached its low point,” BME Managing Director Dr. Silvius Grobosch stressed on Thursday in Eschborn.

“After a long dry spell, the first signs of stabilization are emerging in German industry. Should there be an agreement between the USA and China in the trade dispute now, the chances of an upward trend next year would be high,” said Dr. Gertrud R. Traud, Chief Economist at Helaba Landesbank Hessen-Thüringen, commenting on the current EMI data on Thursday in response to a BME request.

“German growth for the third quarter should be below zero again. The industry is still slowing down strongly,” said Dr. Ulrich Kater, Chief Economist at DekaBank, to the BME on Thursday.

“The EMI, which rose marginally in October, cannot conceal the clearly tense economic situation. This is supported by the latest figures from the DIHK economic survey of autumn 2019,” Katharina Huhn, Head of the Department for Economic Affairs, Growth and Corporate Surveys at the DIHK, told the BME on Thursday. The 28,000 company responses confirmed that the prevailing uncertainty remains. More frequently than ever since the beginning of the survey in 2010, companies saw economic policy conditions as a risk for their business development. “According to the EMI, the capital goods sector, which includes mechanical engineering and vehicle construction, was comparatively the worst performer. Falling delivery times and purchase prices indicate a continued weak level of demand,” Huhn continued. The business outlook thus remained gloomy, even with a slight improvement in the EMI. Companies are facing major economic challenges internationally due to the continuing low export expectations. In Huhns' opinion, the German government should therefore act urgently. "For example, we are missing an initiative to revive the WTO. Moreover, new trade agreements between the EU and the Mercosur states or Vietnam are an important step towards greater reliability in world trade, especially for export-oriented German companies,” emphasized the DIHK economic expert in her statement for the BME.

Dr. Heinz-Jürgen Büchner, Managing Director Industrials, Automotive & Services of IKB Deutsche Industriebank AG, told the BME on Thursday: “Despite a slight revival of the EMI, commodity prices show a strongly divergent development. While standard steel grades, for example, recorded a sharp decline on the European market, prices on the US market have already risen significantly again. Although base prices for stainless grades in Europe fell slightly, alloy surcharges remained firm or were raised slightly. The latter is mainly due to the nickel price trend. There were also slight price increases for some nonferrous metals. A sustained recovery is not expected until the first half of 2020. We also see crude oil prices firmer for the time being: the intervention in Syria is having an impact here. The border-crossing price for natural gas also has further upward potential.” The development of the EMI sub-indices at a glance:** Industrial production:** Production rates in the manufacturing sector were again significantly reduced in October. Although the seasonally adjusted subindex improved somewhat compared to the 86-month low of September, it was still at one of the lowest levels since 2009. Similarly, strong rates of decline were recorded in all three sub-sectors of industry (consumer goods, intermediate goods and capital goods).

Total order intake/exports: The sector-wide slump in demand continued in October with the 13th consecutive drop in order intake. After all, the corresponding subindex improved to its highest level in four months compared with September, when it was measured at the lowest level since April 2009. A large number of survey participants continue to deplore the continuing uncertainty and the associated reluctance of many customers to place new orders and make investments. Some of the purchasing managers surveyed reported lower sales with international customers from the automotive industry. The generally weaker demand in the Asian markets was also frequently mentioned.

Employment: The increasingly poor order situation is also having an impact on the labor market. In October, job cuts in the manufacturing sector accelerated again and were faster than at any time in almost ten years. However, the extent of the job cuts that took place during the global financial crisis is still a long way off. Companies that reported a drop in employment often justified this with the reduction of temporary workers and temporary workers. In addition, several respondents pointed to the introduction of short-time work in the company.

Purchase/sale prices: The seasonally adjusted sub-index purchase prices slipped even deeper into the red in October, signaling a stronger decline in average purchase prices. Among the items most frequently reported as being cheaper were metal components, steel and plastics. In most cases, the price reduction resulted from the oversupply on the market.

Many manufacturers often passed on their cost savings in the form of lower selling prices. In addition, against the backdrop of fierce competition, some companies granted discounts to their customers. It was the fourth month in a row that average selling prices fell. What's more, the decline accelerated again and was stronger than at any time since November 2009.

Annual outlook: The number of manufacturers expecting business losses within a year exceeded the number expecting growth in October as well. After all, the corresponding subindex continued to improve from its low in August to its highest level since June. The confidence of many industrial companies continues to be dampened above all by the Brexit, the trade conflicts, the cooling of the domestic and global economy and the problems in the automotive industry.

About the EMI: The IHS Markit/BME-Einkaufsmanager-Index (EMI) provides a general overview of the economic situation in German industry. The index has been published under the auspices of the BME since 1996. It is compiled by IHS Markit, a provider of corporate, financial and economic information headquartered in London, and is based on a survey of 500 purchasing managers/managers in the manufacturing industry in Germany (selected as representative of the German economy by sector, size and region). The EMI is modelled on the US-Purchasing Manager's Index (Markit U.S.-PMI).