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Is Germany gearing up for an economic comeback?

The HCOB Purchasing Managers' Index for Eurozone industry rose to 47.3 points in May, compared to 45.7 in April, marking the highest reading since March 2023. This indicates that the sector shrank at its slowest rate in over a year.

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Industrial PMIs rose in most of the countries covered. In Germany and France, the largest economies in the euro area, the downward trend slowed, with Germany continuing to perform the worst. In contrast, Spain and the Netherlands experienced an upturn, with the strongest growth in industrial sectors since 2022. Greece remained the top performer, although growth slowed to a four-month low.

Germany may soon attempt to overtake other countries. Despite a significant increase in the HCOB PMI, Germany still ranks last among the four major Eurozone countries but is hot on Italy’s heels. In Italy, which until recently was considered an outperformer, the situation has deteriorated noticeably.

France follows closely behind, with the industrial sector having improved less than in Germany in recent months. Only Spain seems to be uncatchable for the time being; it is currently the only Eurozone-4 country with a growing industrial sector, commented Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

Production in the eurozone almost stabilized in May. Although there was another decline, it was minimal and at the lowest rate in over a year. The renewed decline in orders remained a braking factor, although the decline was the smallest in two years.

New export business recorded its smallest losses since May 2022. To support production amid continued subdued demand, order backlogs were significantly reduced again, but at the lowest rate since August 2022.

Due to persistent overcapacity, employment in Eurozone industry fell for the twelfth month in a row, although job cuts were only moderate, as in April. Purchasing volumes were reduced in May at the lowest rate since September 2022, as inventories were sufficiently filled.

In fact, stocks of input materials were reduced for the 16th month in a row. Delivery times for raw materials and other production materials shortened again. Purchasing prices also fell again in May, but this time only minimally and at the lowest rate since the price decline began in March 2023. Selling prices were also reduced again.

With the highest value since February 2022, the business outlook for the year was again above average optimistic.

Light at the end of the tunnel?

The HCOB Purchasing Managers’ Index for Germany rose in May for the second month in a row to 45.4 points (April: 42.5). Although the index remained below the growth threshold of 50.0 points, it reached the second highest level in 15 months.

The biggest positive impact came from incoming orders, whose decline was not only weaker than in April but also the smallest in two years. Demand from China and the USA, in particular, picked up again. Production was also cut back less sharply and shrank by the smallest amount since May 2023. Manufacturers of intermediate goods even recorded a solid increase.

There is finally light at the end of the tunnel. After the global environment in the manufacturing sector had already brightened up in recent months, the spark now seems to be gradually spreading to German manufacturers. The production index made a strong jump towards the 50-point mark in May, signaling that companies have hardly reduced their production on average – the previous twelve months had seen consistently strong declines, according to de la Rubia.

Order backlogs continued their sharp downward trend, although the associated index rose to its highest level in 20 months. Employment in industry fell again, and the rate of reduction remained unchanged from the previous month. Despite the job cuts, optimism among manufacturers about growth opportunities within the year is growing. The outlook improved for the third time in a row and reached its highest level since February 2022, driven by hopes of falling interest rates.

Inventories of both finished products and intermediate materials fell again significantly in May. Although the purchasing volume shrank by the smallest amount since September 2022, it remained greater than the decline in production. Competition among suppliers led to falling purchasing prices in May, and the deflation rate accelerated for the first time in six months.

Meanwhile, delivery times shortened again, but the improvement was the smallest in three months. In order to win new orders, many manufacturers offered discounts, which was reflected in the twelfth decline in selling prices, which hardly changed compared to the previous month.

Finally, the logistics indicator for May 2024, compiled by the German Logistics Association (BVL) and the Munich-based Ifo Institute, also recorded another upward trend, reaching its best value in a year. The companies surveyed rate their current business situation better than in the recent past. However, skepticism regarding business expectations for the next six months remains, and the general mood in the industry remains subdued.