Germany’s manufacturing sector is still weakening after 18 months
Germany’s manufacturing industry has been weakening in the last 18 months as reflected by a wave of job cut announcements and a production decline (cf. graph 1) in the sector. This export-led sector has indeed been hit by large uncertainties and hurdles at the global level such as developments in the China-US trade war, fears of a disorderly Brexit, a slowdown of the economic activity in China and by both temporary and more structural overhauls affecting the car industry, which have spread to other industrial sectors. The automotive, electrical equipment and basic metal (including steel) sectors are those which have seen their production volumes decline the most and by 8%, 9% and 11% respectively between July 2018 and November 2019.
The downturn is also reflected in financial data from German companies in the sector. In the steel sector for example, last available data indicate that profitability has deteriorated quite significantly since 2018. For capital goods, profitability has been mostly flat while debt ratios have increased after three consecutive years of decrease. In the car and components sector, profitability is suffering for the second year in a row.
Short-term outlook clouded by the threat of new protectionist measures
Regarding the outlook, high-frequency indicators give some hints about the evolution. Last September, the manufacturing Purchasing Managers’ Index (PMI) reached its lowest level since June 2009. As it picked up again in October and November, hope emerged that the downturn had bottomed out. However, the indicator declined again in December, suggesting that the sector was not out of the woes. November data that show factory order deterioration, mainly due to a drop in foreign orders, confirmed the sentiment that troubles were not over. January’s PMI increased again but it remains well below 50, in the contraction zone.
A trade war easing between China and the US in the wake of the ‘Phase One’ agreement could lift some of the uncertainties that have weighed down on business sentiment. However, some negative consequences for Europe could result from it since it has committed the country to buying more of some specific US products and it could therefore divert a share of the Chinese demand for those goods from Europe. For Germany, that would be mostly the case for cars. Also, the risk exists that it switches the focus of the US authorities to Europe, with which it has the second-largest trade deficit. Even though some willingness to come to a truce in the coming months appeared in Davos, trade tensions between the US and the EU are still alive. In that regard, the nuclear option of US tariffs on the European car industry, which has been avoided up to now with the expiry of the Section 232 investigation last November, has not completely vanished. Also, the tariffs on European exports to the US linked to European subsidies for Airbus are already impacting the European agricultural sector as well as the machinery and equipment and the textile sectors, and Mr Trump threatens to impose additional tariffs on European exports because of the digital tax imposed by European leaders. Finally, the carbon tax planned in the framework of the European Green Deal could be the object of retaliatory measures from the US.
A deeper slowdown of the Chinese economy as the coronavirus evolves and supply chains are disrupted should also take its toll on Germany’s manufacturing sector, as it would inevitably reduce its exports.
Slovakia and the Czech Republic impacted with a few quarters of delay
The industrial sector in some countries of central Europe, whose supply chains and exports are very much dependent on Germany, has also started to slow down, following their neighbour with a delay of a few quarters. It is in particular the case for the Czech Republic, and mostly Slovakia (cf. graph 3).
In Slovakia, data from IHS Markit indicate that the metal and metal products sector, the rubber and plastic sector and the computer and electronic products sector saw the largest decline in production last year (up to November). The transport equipment sector started to decline in the second half of the year. Among large manufacturing industries, only the machinery and equipment and the food sectors reported growth.
Regarding the Czech Republic, the same source reports a decline in the machinery and equipment and in the metal products sectors for last year (up to November). As the PMI for the country remains well in contraction territory (cf. graph 2), weaknesses are still expected to last for some time in the Czech manufacturing sector.
Analyst: Florence Thiéry – email@example.com