BME Purchasing Managers’ Index Confirms Upward Trend in Germany

The IHS Markit/BME Purchasing Managers’ Index (PMI) indicates that the German industrial sector continues to consolidate. The PMI rose to 51.0 points in July. However, a cloud on the horizon is forming due to a lack of demand, especially from abroad. Overall, the sentiment remains positive.

(Eschborn/London) The German industry continues its upward trend despite the Corona crisis. The manufacturing sector benefits from both growing export business and increasing domestic demand. The PMI climbed to 51.0 points in July thanks to increased new orders.

The German industrial sector continues to consolidate. This is signaled by the seasonally adjusted IHS Markit/BME Purchasing Managers’ Index (PMI), which soared to 51.0 points in July from 45.2 in the previous month. The important leading indicator for the economic situation in manufacturing has thus exceeded the growth threshold of 50.0 points for the first time since December 2018, as reported by the English financial service provider IHS Markit in London. At the same time, the German PMI also moved further away from its low point (34.5) in April of this year when large parts of the industry were at a standstill due to Corona-related restrictions. The significant increase in new orders was primarily responsible for the peak value in July, which also led to a noticeable rise in the production rate.

Reason for Hope for the Third Quarter

“The current PMI data give reason to hope that the upward trend now observed will continue and solidify in the third quarter. However, setbacks are always possible given that the Coronavirus pandemic has not yet been overcome,” emphasized Dr. Silvius Grobosch, Managing Director of the Federal Association for Materials Management, Purchasing and Logistics (BME), in Eschborn.

“How nice it is to see the PMI back in the expansion zone. The second quarter was worse than during the financial crisis, with a decline of 10.1 percent, and the annual average for 2020 is expected to be 6.4 percent, which is also worse than the 5.7 percent back then. Although infection numbers remain high, a recovery is emerging in the second half of the year,” commented Dr. Gertrud R. Traud, Chief Economist of Helaba Landesbank Hessen-Thüringen, on the current PMI data at BME’s request. The expansive monetary and fiscal policies are supportive. As long as there is no national lockdown again, economic activity will resume its course – including structural changes. “In 2021, we expect GDP growth of five percent in Germany. However, the pre-crisis level will not be reached again before the end of next year,” added the Helaba bank director.

After V-Shaped Recovery, Demand is Lacking

“The good sentiment values show that we are still in the area of the V-shaped recovery of the economy from the lockdown. This phase will soon come to an end, and then some persistent problems will emerge,” said Dr. Ulrich Kater, Chief Economist of DekaBank, to BME. There is a lack of demand, especially from abroad, and many companies need to implement significant cost reductions. “The last meters of recovery will be difficult,” Kater concluded.

Regarding the recent development of the PMI sub-index for purchase prices, Dr. Heinz-Jürgen Büchner, Managing Director of Industrials, Automotive & Services at IKB Deutsche Industriebank AG, told BME: “The significantly improved expectations of the economy are also reflected in the rising raw material prices. For instance, the crude oil price has sustainably stabilized above 40 US dollars per barrel of Brent. Copper and some other industrial metals have also risen significantly. Recently, even the decline in electricity prices seems to have stopped. However, a special situation is observed with gold and silver: Their price increase still reflects significant uncertainty – with corresponding speculative demand. Additionally, the weak dollar supports this.”

Overview of the Development of the PMI Sub-Indices:

Production:

The seasonally adjusted production sub-index continued its steep upward trend in July and improved further from the record low in April. Moreover, for the first time in over a year and a half, the growth threshold of 50.0 points was exceeded again. According to respondents, the recent increase was due to a strong surge in new orders.

Total New Orders/Export Orders:

The pent-up demand that had built up over the past months was unleashed in July in a veritable flood of new orders. The result marks a turnaround compared to the record decline in new orders at the beginning of the second quarter. The seasonally adjusted sub-index is thus back in growth territory for the first time since September 2018 and reached the highest value in two and a half years – which is also significantly above that of production.

Export orders also rose sharply in July. After a 22-month contraction phase – including the all-time low in April – this sub-index also returned to the growth zone and reached the highest value since April 2018 (although still significantly below the total new orders). More orders came especially from China; but demand also picked up again in several European countries.

Annual Outlook:

Manufacturers are increasingly optimistic about their future production. Accordingly, the majority hope that demand will continue to rise and that the Corona-related restrictions will gradually be eased worldwide. The corresponding sub-index rose to its best value since August 2018. However, many managers indicated that any growth starts from a low level and that business activity will remain below the level that prevailed before the pandemic for quite some time.

Employment:

The current data signal a further significant decline in employment in the manufacturing sector. Moreover, the rate of contraction increased compared to the previous month and approached the value of the 11-year low in May. About 30 percent of survey participants reported staff reductions, which were mostly achieved through the termination of temporary workers and the non-filling of open positions.

Purchase/Sale Prices:

The fierce competition among suppliers and falling raw material costs led to a further decline in average purchase prices. The rate of decline remained strong but weakened for the second month in a row. The fifteenth consecutive decline marked the longest contraction in this category since the survey began in 1996.

Even at the beginning of the third quarter, manufacturers’ pricing power remained limited. The enormous competitive pressure allowed many customers to demand discounts, sometimes vehemently.

About the PMI

The IHS Markit/BME Purchasing Managers’ Index (PMI) provides a general overview of the economic situation in the German industry. It is a snapshot of the manufacturing sector – calculated from the sub-indices for new orders, production, employment, delivery times, and raw material inventories. The index has been published since 1996 under the auspices of the BME. It is produced by the provider of corporate, financial, and economic information IHS Markit, headquartered in London, and is based on a survey of 500 purchasing managers and executives in the manufacturing industry in Germany (representative of the German economy by sector, size, and region). The PMI is modeled after the US Purchasing Managers’ Index (Markit U.S.-PMI).

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