Germany’s Manufacturing Sector Faces Deepening Declines

Highlights

• Germany’s manufacturing sector faces challenging conditions.
• Significant drops in output, new orders, and prices reported.
• Decline in PMI® to 38.8 indicates sharp business downturn.

Overview

At the start of the third quarter, Germany’s manufacturing sector continued to grapple with challenging business conditions, according to the latest HCOB PMI® survey conducted by S&P Global. Goods producers reported significant drops in output, new orders, and factory gate prices, highlighting the worsening state of affairs. The headline HCOB Germany Manufacturing PMI® fell to 38.8 in July, the lowest reading since May 2020, indicating a sharp decline in overall business conditions.

One of the main drivers of the decline was the sustained sharp downturn in new orders, which experienced the most significant decrease in over three years. Weak demand was evident across all categories of goods, with clients adopting a wait-and-see approach and reducing their stock levels. Economic and geopolitical uncertainty, along with tighter financial conditions, also contributed to the downturn in demand. This resulted in a sharp and accelerated reduction in international sales.

The production levels in July marked the third successive month of contraction, reaching the fastest rate since the initial COVID-19 shutdowns in early 2020. Manufacturers continued to reduce backlogs of work, further underscoring the challenging environment. Firms’ expectations for future production deteriorated for the third consecutive month, leading to the first drop in workforce numbers since January 2021.

The survey also revealed a fall in average factory gate charges for the second consecutive month. Growing competition and easing underlying cost pressures were cited as the reasons behind the decline. Input costs and output prices fell at the fastest rates since 2009, with falling energy prices and a drop in raw material costs influencing the trend.

Commenting on the PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, expressed concerns about the pronounced fall in demand for German manufactured goods, emphasizing the likelihood of a recession. He also noted that deflation was evident in the goods sector, driven by the significant drop in input and output prices. Dr. de la Rubia highlighted the speedy improvement in delivery times, signaling a return to normalcy in supply chains.

With the German economy facing increased risks in the second half of the year, the manufacturing sector’s performance has raised questions about the robustness of the labor market. However, there is hope for a rebound next year if firms begin to rebuild their stocks.

In conclusion, the German manufacturing sector is grappling with significant challenges, and the uncertain economic environment remains a major concern. The decline in various key indicators underscores the urgency of addressing the current headwinds and fostering a path to recovery.