May data indicated that output and new order growth both slowed markedly in the German manufacturing sector. As a result, the final 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 – dropped to 58.4, from a survey-record high of 61.6 in April (revised from 61.5). Although the PMI remained well above the neutral 50.0 level in May, the latest reading was the lowest for three months. The earlier “flash” reading was 58.3 in May.
Production growth slowed to the weakest for four months in May. This reflected much slower expansions of output in all three market groups. Despite easing sharply from April’s survey record high, the overall rate of output growth remained substantial in May.
Higher levels of production have now been recorded for eleven consecutive months, driven by a sustained rebound in incoming new business. However, new order growth also lost momentum in the latest survey period, which firms generally linked to fragile confidence among clients. May data highlighted a softer slowdown in export orders compared to total new work, with the rate of expansion remaining close to a record high. Survey respondents noted that the United States and Asia were the main sources of new export order growth.
Latest data pointed to a rise in stocks of finished goods for the first time in a year-and-a-half, although the pace of increase was only modest. While this was primarily linked to higher production and reduced caution about stock levels, there were some reports by manufacturers of unwanted inventory building following weaker than expected sales in May.
Meanwhile, stocks of purchases increased again, and at the fastest pace since June 1998. Anecdotal evidence pointed to rising output requirements, alongside efforts to guard against delivery delays and higher prices from suppliers. Correspondingly, manufacturers indicated a further sharp expansion of input buying, although the rate of growth eased from April’s record high.
Manufacturers indicated another steep deterioration in vendor performance in May. Average lead-times have now lengthened for ten consecutive months, mostly reflecting shortages of stock and stretched capacity at suppliers.
Average input prices increased sharply in May, with the rate of inflation only slightly below the 20-month high registered in April. A number of survey respondents commented on rising steel and energy prices. There were also reports that the weakened euro/dollar exchange rate had pushed up the cost of imported raw materials.
Higher input costs resulted in a further rise in factory gate charges in May. Increased output prices have been recorded for four months in a row and the latest rise was stronger than the long-run series average. However, manufacturers noted that weak pricing power continued to restrict their ability to pass on higher costs to clients.
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’s expansion cooled sharply in May, after hitting a blistering 14-year survey record pace in April. Growth remained strong, however, with the manufacturing sector and exports in particular continuing to act as key drivers of economic recovery in the second quarter. The weakening of the euro in recent weeks should also help boost exports further in coming months. On the other hand, the uncertainty created by the European sovereign debt crisis had a clear and rapid impact on business conditions during the month, and could result in a further weakening of growth if it persists."
