German manufacturing sector remains strong; PMI jumps to 61.2

Markit Research

The German manufacturing recovery gathered momentum in July, as highlighted by a rise in the seasonally adjusted Markit/BME Germany Purchasing Managers’ Index (PMI) to 61.2, from 58.4 in the previous month. The index – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – has now posted above the neutral 50.0 level for ten successive months. Moreover, the latest reading was the highest for three months and signaled the second-sharpest improvement in operating conditions since the series began in April 1996.

July data pointed to a sharp increase in German manufacturing production and incoming new business, with both rates of growth the most marked since April. Faster rises in output were recorded in all three market groups, but production growth in investment and intermediate goods continued to outpace consumer goods.

New business levels increased for the 13th consecutive month and the rate of expansion was much faster than in June. Anecdotal evidence suggested that improving economic conditions and, in some cases, restocking by clients had boosted demand in July.

Although new export orders continued to rise at a strong pace, the latest increase was the least marked for six months. Manufacturers cited a dip in global trade flows and fragile demand within the euro area. July data pointed to solid rises in new work from abroad in the intermediate and investment goods sectors, but a reduction in new exports received by the consumer goods sector.

Increased workloads resulted in a further sharp rise in backlogs and an acceleration in jobs growth during July. Staffing levels have now risen for four months in a row and the latest increase was the fastest since May 2008. Reports from survey respondents linked job creation to higher capacity utilization and rising output requirements. Market group data pointed to robust staff hiring at intermediate and investment goods producers, but a stagnation in the consumer goods sector.

Input cost inflation continued to ease in July, with the latest rise in purchasing prices the slowest since February. Where an increase in cost burdens was reported, this was generally attributed to stock shortages at suppliers. There were also some reports that the weak euro/dollar exchange rate had raised the cost of imported raw materials. Meanwhile, factory gate charges increased for the sixth month running, but the rate of inflation eased since June.

German manufacturers indicated the second-sharpest deterioration in supplier performance in over fourteen years of data collection. This reflected stock shortages and capacity constraints at vendors. Consequently, firms sought to build up their inventories of raw materials in July, extending the current period of rising input stocks to four months. In contrast, finished goods inventories fell slightly in July, which survey respondents mostly linked to stronger-than-expected sales at their plants.

Commenting on the final Markit/BME Germany Manufacturing PMI survey data, Tim Moore, economist at Markit and author of the report, said: “A sharp improvement in new order volumes propelled manufacturing output growth to its fastest for three months. Strengthening demand was concentrated in domestic markets, as new export work increased at the weakest pace for six months. Despite an exports slowdown in July, German manufacturers appear increasingly confident about the sustainability of the recovery in the sector. Improved optimism regarding future production requirements was highlighted by a another solid rise in pre-production inventories and the strongest rate of job creation for over two years.”

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