Moreover, the optimism of the surveyed producers is not decreasing. Their expectations for the next 12 months remained at the level from January, when they were the best in 9 months. Manufacturers continued to clear inventory from warehouses that were remnants of the uncertain times of the pandemic. Input stocks fell to their lowest level in six months. Stocks of finished goods were also smaller than a month earlier.
Delivery times have also shortened compared to January. This signals the adaptation of global supply chains to the new reality caused by the crisis in the Red Sea. In general, however, the shorter delivery times in comparison to previous years still result primarily from low demand.
Welcome increases
It is worth emphasising that the decline in the PMI index in the eurozone is primarily the fault of German industry. The PMI index for the largest EU economy dropped the most in 4 months, to 42.5 points, which stands out negatively against the background of other eurozone countries. Greece and Ireland recorded the best index performance in 24 and 20 months, respectively. The PMI index for Greece was a very healthy 55.7 points.
Ireland was also above the neutral threshold of 50 points, meaning an increase in industrial activity. The “Emerald Isle” boasted a reading of 52.2 points. Spain also broke the 50-point threshold (reaching 51.5 points). The country recorded an increase in industrial activity for the first time in almost a year. The Netherlands (49.3 points), Italy (48.7 points), and France (47.1 points) also had the best readings in almost 12 months. It is worth noting that the former are already close to the growth zone.
“The year-long recession in European industry is not yet coming to an end. Production fell at the same rate as a month earlier, mainly due to heavyweight countries such as Germany and France (…). However, a positive sign is the milder decline in new orders in the eurozone, providing a glimmer of hope for a potential return of demand in the future,” comments Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
Dr. de la Rubia says that eurozone producers are currently adopting a cautious, wait-and-see attitude. “The general sentiment is that the future is not expected to be particularly bright, but this does not mean that companies are preparing for difficult times,” says an expert from a Hamburg bank. He adds that companies maintain current operations and are ready to shift gears at any time when there are concrete signs of improvement in the market situation.
Germany
While there are some reasons for optimism in the eurozone industry as a whole, in the eurozone’s largest economy, as we have already mentioned, the situation does not look good. While more and more countries can boast of increasing industrial activity, industry, which is the foundation of this country’s economic power, is cooling down instead of warming up. The mentioned decline in the index was the first in 7 months.
Moreover, it came after January reached its best level in 11 months. The level of production and new orders, which are the basis for industrial development, saw an accelerated decline in February. The production sub-index was at its lowest level in eight months. The index of new orders also performed worse than in January – while those from abroad were at a similar level as a month ago, domestic orders dropped significantly, which proves the poor mood of German consumers.
Demand for German products was so weak that manufacturers could focus on catching up on production backlogs. These have fallen at a faster rate than the average for the last 21 months. The mood of producers regarding the next 12 months was negative in February for the first time since November 2022. The main factors influencing this approach of producers were economic uncertainty and lack of investments.
Moreover, in February, Germany recorded the strongest reduction of jobs in industry since August 2020. Dr. de la Rubia of Hamburg Commercial Bank is less than optimistic about the current climate, stating: “All hope is gone – for now. (…) The wide scale of the slowdown gives very little hope for a rebound in the near future,” he claims.
Producers of investment goods recorded particularly strong declines, being the heart of German industry. A stronger reduction in employment than in other industries also means that the future of the German manufacturing sector looks bleak. HCB’s chief economist emphasises that the condition of the German sector is currently a shameful exception in Europe, which will probably lead to a debate in Germany regarding deindustrialisation and its necessity to carry out reforms in this country. German industry is dragging down the entire economy of this country.
The Ifo economic climate index increased slightly in February to 85.5 points from January’s 85.2 points. The mood in the industry has dropped significantly in trade and the climate in the service sector. Mood in construction, however, they are still at a low level. As the authors of the analysis from the Ifo Institute emphasise, “the German economy is stabilizing at a low level.”
What do the results mean for Poland?
Despite the fact that Germany is Poland’s largest trading partner, responsible for 28 percent of our exports and 20 percent of imports, the adventures of industry do not seem to affect the condition of the manufacturing sector in Poland. In February, the PMI index for Polish industry increased from January’s 47.1 points to 47.9 points.
This does not change the fact that it remains below 50 points for 22 months now. It is also the longest sequence of declines in production and new orders in the history of research (since 1998). Nevertheless, the pace of decline in these indicators in February was among the slowest in the last two years.
The most favorable annual forecast of the surveyed producers since June 2021 is also an optimistic signal. On the other hand, demand for Polish industrial products (new orders) has fallen for the 24th month in a row.
In the case of Germany, the source of demand weakness was the internal market, in the case of Poland, external demand was mainly weak, especially from Germany.
However, the rate of decline in export orders was also among the slowest in the current downward sequence. Manufacturers continued to adjust production capacity in February. Inventories of inputs and finished goods were depleted at a faster rate, and purchases of inputs slowed sharply.
Interestingly, while in Germany and the eurozone February brought a decline in the prices of production inputs (as well as final products), in Poland the prices of production components increased in the second month of the year, which is probably an echo of the crisis in the Red Sea and, despite everything, high inflation in the country. Overall, however, prices of final products also dropped in Poland, as companies were struggling to become more competitive in the face of weak demand.
Trevor Balchin, economic director of S&P Global Market Intelligence, is quite optimistic about the future of Polish industry.
“It looks like the worst period of slowdown is already behind us. The PMI index, although still below 50.0 points, reached the fourth highest result since the second half of 2022, and the ratio of the number of new orders to the volume of inventories recorded the highest level in nine months. Moreover, forecasts for the next 12 months in the industrial sector improved further, reaching the highest level since June 2021,” summarises Trevor Balchin.