The European industrial sector remains entrenched in a nearly two-year crisis. The PMI index for the Eurozone fell from 46.1 points in March to 45.7 points. This latest result is the lowest in four months and indicates worsening conditions for manufacturing activities. Notably, the index has remained below the neutral 50-point level for 22 consecutive months.
A Struggling Manufacturing Sector
What will save the Eurozone economy? Although this is a challenging question, one thing is certain: it will definitely not be the manufacturing sector, said Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
The first month of the second quarter did not bring the long-awaited improvement. Production declined at the slowest pace in over a year, which is positive, yet it still underscores the fragility of the manufacturing sector across the Eurozone. In the absence of growth, we celebrate a slower decline.
Unfortunately, there’s little cause for optimism. Despite the weakening decline in current production, new orders fell at a sharper rate in April than in earlier months. Export orders in individual countries dropped particularly severely.
As new orders plummeted, manufacturers reduced their purchasing activity and relied on inventory accumulated during previous boom periods. These inventories have been shrinking for the last 15 months, and the inventory cycle shows no signs of recovery, according to Dr. de la Rubia.
Although the shorter delivery lead times are a positive development for manufacturers, it reflects low demand for goods and production inputs. Operating costs for manufacturers decreased marginally, leading to a decline in final product prices for the twelfth consecutive month.
The ongoing negative trend in European industry continues to affect employment. Production companies plan further layoffs, though at a slower pace. Business sentiment improved for the second month in a row, reaching its highest level since February 2022.
Roles Reversed
In recent months, Southern European countries have led industrial performance. This marks a shift compared to the past decade or two when these countries lagged behind in European economic growth. Today, they lead the pack, while the countries that criticized their economic policies in the past are now feeling the slowdown most.
In April, Greece (55.2 points) and Spain (52.2 points) both posted increases in industrial activity (PMI index above 50). However, Greece is showing signs of fatigue with its weakest result in three months. Meanwhile, Spain reported its best result in 22 months.
The Netherlands defended Northern Europe’s honour with 51.3 points, their best result in 20 months.
However, these three countries could not shift the Eurozone towards growth. The outlook remains bleak for Germany (42.5 points), France (45.3 points), and Italy (47.3 points), all significantly below 50 points.
The German challenges persist
The state of the German industrial sector deserves close scrutiny.
In April, the PMI index for German industry slightly improved from 41.9 points in March to 42.5. Despite this, it remains well below the neutral 50-point level. The April improvement was driven by a slower decline in production, but new orders continued to decline, reaching their lowest point since November last year. This was primarily due to high customer inventory levels and a lack of demand for capital goods.
Interestingly, however, the decline in new export orders was the lowest in a year. This bodes well for Polish carriers, who frequently operate routes between Germany and neighbouring countries.
Nevertheless, Germany is seeing similar trends as in the Eurozone: reduced purchasing activity, reliance on inventories, shorter lead times, and lower production costs and final prices.
In April, the decline in production input prices was the weakest in 14 months, due to higher costs for some chemicals and metals, while final product prices dropped the most since September 2009.
German producers’ optimism for the next 12 months grew for the second consecutive month and is at its highest since April 2023.
Germany losing its advantages
Dr. de la Rubia is less optimistic. He notes that new orders in Germany are falling more sharply than the Eurozone average. He says lower economic growth in China has also negatively affected German exports, and China now competes with Germany in automotive and mechanical products, areas where Germany previously dominated.
However, he also believes that German industry could return to growth in the second half of the year due to improved global economic conditions.
Poland’s PMI in decline
Poland experienced an unpleasant surprise as its PMI index for April fell by over two points. While the index was 48 in March, close to the neutral 50-point threshold, it dropped to 45.9 in April. This decline was the deepest since July 2022.
This marks the 24th consecutive month with an index below 50, the longest streak since the PMI index was first tracked in Poland in 1998.
Four out of five sub-indices fell: new orders, employment, delivery times, and inventories. Production was the only sub-index that remained stable.
New orders declined for the 26th consecutive month, the longest on record. April’s fall was the steepest this year, with weak demand domestically and in key foreign markets, especially Germany, France, and Italy.
Industrial employment has been falling for 23 months, the longest decline in 20 years. April’s drop was the fastest in five months.
Similarly to the Eurozone, producer purchasing activity and inventory levels have declined, while prices have also fallen.
Polish manufacturers remain optimistic about the next 12 months, hoping for improved market conditions and increased exports, though growth expectations are at their weakest in six months.
“While April data from Poland is generally weaker, preliminary Eurozone data offered a glimmer of hope that European demand might soon pick up as overall output increased for the second consecutive month and Germany returned to growth,” said Trevor Balchin, Economic Director of S&P Global Market Intelligence.
Recovery Likely in the Second Half
Hopes for a rebound in Poland and Europe will likely need to wait until the second half of the year.
According to Dr. de la Rubia, the current state of the industrial sector—with low orders and reduced purchasing activity—suggests that any recovery will be delayed until at least summer.
The Hamburg Commercial Bank expert points out that economic recoveries typically begin with positive signals in the capital goods segment.
“These goods had a tough time in April as demand fell in the Eurozone’s three largest countries,” he said.
Dr. de la Rubia remains hopeful that positive developments in the global economy will translate into the Eurozone and allow lagging economies like Germany, France, and Italy to catch up to Europe’s leading nations.
Photo by Lenny Kuhne on Unsplash