German manufacturing output increased sharply in June

June data pointed to another sharp rise in German manufacturing production, extending the current period of expansion to 12 months. Growth of output and employment picked up slightly since May, with the latter the strongest for two years.

However, the seasonally adjusted Markit/BME Germany Purchasing Managers’ Index (PMI) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – was unchanged at 58.4 in June, as slower new order growth offset stronger positive influences from the employment and output indices. Nonetheless, the latest PMI reading was above the neutral 50.0 mark for the ninth month running and signaled a solid improvement in overall conditions in the manufacturing sector.

Higher levels of production were recorded in all three market groups monitored by the survey, with growth strongest in the intermediate and investment goods sectors. Consumer goods producers continued to record a much slower expansion of output than the manufacturing sector as a whole. Measured overall, the latest rise in production was slightly stronger than in May, but still much less marked than the survey-record expansion seen in April.

The moderation in output growth since the survey-record high registered in April has corresponded with an ongoing easing in new order gains. June data signaled that new order growth slowed for the third month running and was the weakest since December 2009. New export order growth also eased markedly and was the slowest for five months, reflecting weaker rises in all three market groups.

Employment increased for the third month running in June and at the fastest pace for two years. Anecdotal evidence attributed this to higher capacity utilization and the need to boost production. Stronger demand also contributed to higher levels of unfinished work in June, extending the current period of backlog accumulation to nine months.

Increased workloads led to a sharp rise in input buying, with the rate of expansion broadly unchanged since the previous month. Survey respondents also suggested that higher levels of purchasing reflected the need to guard against supplier delays. June data signaled the second-sharpest deterioration in vendor performance since the survey began in April 1996, which was widely linked to bottlenecks and shortages of stock at suppliers.

Inventories data highlighted a further solid increase in stocks of inputs at manufacturing companies, which respondents attributed to rising production levels and the deliberate build up of safety stocks. Meanwhile, inventories of finished goods declined in June.

June data signaled another sharp rise in input costs, partly driven by higher steel prices. However, the overall rate of cost inflation eased to a four-month low. Manufacturers nonetheless reported a solid increase in factory gate charges, in response to strengthening demand and associated efforts to protect margins from higher costs.

Commenting on the final Markit/BME Germany Manufacturing PMI survey data, Tim Moore, economist at Markit and author of the report, said: “The German manufacturing sector finished the second quarter with another strong rise in output levels, but the slowdown in new order growth sounds a note of caution about the outlook for the coming months. With key trading partners in Europe shifting towards austerity measures, export growth momentum suffered a particularly marked slowdown in June. On a more positive note, job creation was the strongest for two years, as rising production and backlogs resulted in additional staff hiring in the sector.”