Germany’s Purchasing Managers’ Index Falls Further in July

The HCOB Purchasing Managers’ Index for Germany (PMI) fell further below the 50-point threshold that separates growth from contraction in July. With 38.8 points, down from 40.6 in the previous month, the lowest value since May 2020 was reached. The decline is primarily driven by the continued decrease in new orders. Many customers are reportedly waiting and first reducing their inventory levels, according to some PMI survey participants. Economic and geopolitical tensions, resulting uncertainties, and less favorable credit conditions are also hindering order intake.

(Eschborn) At the beginning of the third quarter, business activity in the German industry continued to decline. Production, new orders, and producer prices all shrank at accelerated rates in July 2023, as reported by the US financial services provider S&P Global. “The German economy is in a bind. This is confirmed by the current PMI following the disappointing preliminary GDP figures for the second quarter of 2023. Persistently high energy prices, the ongoing shortage of skilled workers, and escalating geopolitical tensions are just some of the obstacles slowing down our industry,” emphasizes Dr. Helena Melnikov, CEO of BME. “The order books of industrial companies are rapidly emptying. Given the current situation, a short-term revival of the economy seems more illusion than reality.”

“Germany is increasingly becoming a burden for the Eurozone, as the current purchasing managers’ survey shows. In hardly any other country is the economy currently under as much pressure as here,” says Dr. Ulrich Kater, chief economist of DekaBank, to BME. “The winter recession is followed by summer stagnation. High interest rates and weak investment are particularly dampening domestic demand,” reports DIHK economic expert Dr. Jupp Zenzen to BME. Due to the sluggish global economy, no significant growth impulses from abroad are expected either. The industry’s order cushion continues to shrink. Zenzen adds: “Improvement is not really expected this year.”

Regarding the recent development of the PMI sub-index for purchasing prices, Dennis Rheinsberg, Director – Energy & Industrials at IKB Deutsche Industriebank AG, provides the following assessment to BME: “Purchasing prices continued their downward trend in July as expected against the backdrop of the economic development. Only a few listed raw materials, such as copper and particularly crude oil, developed in the opposite direction. However, the overall low inventory and stock levels are increasingly supporting the market prices of many raw materials. The sharp rise in oil prices also reflects the supply shortage due to OPEC’s production cuts while global demand continues to rise.”

Overview of the development of the PMI sub-indices:

Production: The production level in the manufacturing sector declined for the third consecutive month in July. Moreover, the rate accelerated to the highest value since May 2020. All three main areas of industry (consumer goods, intermediate goods, and capital goods) recorded a decline, which was attributed in almost all cases to the decreasing order intake.

Order Intake: German manufacturers once again recorded an even stronger decline in new orders. The seasonally adjusted sub-index deteriorated for the third consecutive month, falling to the lowest level in over three years. Excluding the pandemic-related lockdowns at the beginning of 2020, it was the strongest contraction rate since March 2009. Uncertainty and inventory reduction among customers, rising interest rates, and the generally sluggish economy were just some of the factors that hindered order intake, as reported by numerous respondents.

Export Order Intake: The negative trend in foreign business not only continued at the beginning of the third quarter but even intensified. The contraction rate fell to its lowest level since May 2020, as demand in key sales markets in Asia, Europe, and North America continued to decline, which particularly affected companies in the capital goods sector.

Employment Slightly Declined

Annual Outlook: Assessments regarding business activity over the next year have deteriorated for the third consecutive month. The annual outlook sub-index fell further below the reference line of 50 to its lowest level since November 2022, reflecting the increasing pessimism among manufacturers. Many particularly lamented the ongoing decline in new orders. Additionally, many expect that the high interest rates and economic and geopolitical uncertainties will hinder future investments.

Employment: For the first time in two and a half years, employment in the industry slightly declined, with job cuts initially limited to the intermediate goods sector. PMI survey participants reporting a decline often attributed this to weak demand, production cuts, or the dismissal of temporary workers.

Purchasing Prices: Average purchasing prices fell sharply in July, as rarely seen before. Aside from the significant declines during the global financial crisis (January-April 2009), the current rate surpassed everything in the PMI data series dating back to April 1996. The declining trend in many raw materials due to falling demand and the lower energy costs were, according to PMI survey participants, responsible for the renewed decline.

Selling Prices Decline for the Second Consecutive Time

Selling Prices: After more than two and a half years of continuous increases, selling prices fell for the second consecutive time in July. It was the most significant reduction since September 2009, which many purchasing managers attributed to the increasingly tough competition for new orders and the passing on of lower costs. In addition to the intermediate goods sector, producer prices also fell this time in the consumer and capital goods sectors.

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