Germany Manufacturing PMI Contraction Deepens as Future Expectations Sank

The latest S&P Global PMI™ for July showed the first contraction of activity in the Germany economy, in 2022 and the worst performance for over two years. Germany’s PMI Composite Output Index registered 48.0, down from 51.3 and a 25-month low. Declines in both domestic and export demand
a combination of an uncertain business environment, supply shortages and stretched client budgets.
Expectations about the future sank into negative territory for the first time since the full-blown pandemic in May 2020. The euro area and the UK were some of the larger manufacturing economies to see new business decline.

The S&P Global Eurozone Manufacturing flash PMI® fell to 49.6 (expected 51.0; last 52.1) 25-month low. and flash Services PMI 50.6 (expected 52.0; last 53.0), 15-month low and a sixth consecutive month of decline in the headline measure. In the UK output growth slows to near-stagnation pace as new order intakes fall for the first time since January 2021.

Germany Flash PMI July 2022 

  • Flash Germany PMI Composite Output Index at 48.0 (Jun: 51.3). 25-month low.
  • Flash Germany Services PMI Activity Index at 49.2 (Jun: 52.4). 7-month low.
  • Flash Germany Manufacturing Output Index at 45.4 (Jun: 49.2). 26-month low.
  • Flash Germany Manufacturing PMI at 49.2 (Jun: 52.0). 25-month low.
  • New export business was sharply lower, with declines seen across both sectors and again to a greater degree in manufacturing – export orders here fell at the greatest rate in 26 months.
  • When considering the outlook for activity, expectations turned notably negative in July. Both sectors saw confidence slump to the lowest since May 2020.
  • Service providers foresee reduced activity over the next 12 months
  • Data were collected 12-20 Jul

Comments on Germany PMI

Commenting on the flash PMI data, Paul Smith, Economics Director at S&P Global Market Intelligence
said:

“Having enjoyed a growth boost from the previous easing of virus-related restrictions, a collision of various headwinds in July served to push the German economy into contraction territory for the first time in 2022 so far.

“Ongoing supply-delays and the uncertainty caused by the war in Ukraine continued to be reported as factors weighing on company performance, but based on a reading of anecdotal evidence, inflation and the pressures these are having on budgets was a noticeable feature behind the worst performance of private sector activity since the height of the first pandemic wave in the spring of 2020. With this in mind, whilst we are seeing a downward trend in our price indices, inflation rates remain stubbornly elevated according to the July survey.

“The decline in output was broad-based, with the downturn in manufacturing deepening, and service sector activity dropping into contraction territory for the first time since December. Moreover, given the noticeable falls in new business across both sectors, activity was somewhat prevented from experiencing a sharper fall thanks to the availability of previously secured contracts. With signs that this supportive prop is coming to an end, and warehouse inventories rising at a near-record rate in manufacturing, the outlook for output is turning increasingly negative. No wonder then company expectations have subsequently dropped into negative territory for the first time in over two years.”


Europe and UK Manufacturing PMI July 2022 

  • Eurozone’s Flash July Manufacturing PMI 49.6 (expected 51.0; last 52.1) 25-month low.
  • Eurozone Flash July Manufacturing Output Index at 46.1 (Jun: 49.3). 26-month low.
  • Eurozone Flash July Services PMI 50.6 (expected 52.0; last 53.0) 15-month low.
  • Flash Eurozone PMI Composite Output Index at 49.4 (Jun: 52.0). 17-month low.
  • Germany’s flash July Manufacturing PMI 49.2 (expected 50.6; last 52.0) and flash Services PMI 49.2 (expected 51.2; last 52.4)
  • U.K.’s flash July Manufacturing PMI 52.2 (expected 52.0; last 52.8) and flash Services PMI 53.3 (expected 53.0; last 54.3).
  • France’s flash July Manufacturing PMI 49.6 (expected 50.8; last 51.4) and flash Services PMI 52.1 (expected 52.7; last 53.9)

Comments on Europe

Commenting on the final Manufacturing PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“The eurozone economy looks set to contract in the third quarter as business activity slipped into decline in July and forward-looking indicators hint at worse to come in the months ahead.

“Excluding pandemic lockdown months, July’s contraction is the first signalled by the PMI since June 2013, indicative of the economy contracting at a 0.1% quarterly rate. Although only modest at present, a steep loss of new orders, falling backlogs of work and gloomier business expectations all point to the rate of decline gathering further momentum as the summer progresses.

“Of greatest concern is the plight of manufacturing, where producers are reporting that weaker than expected sales have led to an unprecedented rise in unsold stock. Production will likely need to be reduced as companies adapt to this weaker demand environment, in turn widely linked to rising prices

“In services, the boost to demand from the reopening of the economy has faded and growth is now at a near standstill, with customers often deterred by the increased cost of living and concerns about the outlook.

“Business expectations for the year ahead have meanwhile fallen to a level rarely seen over the past
decade as concerns grow about the economic outlook, fuelled in part by rising worries over energy supply and inflation but also reflecting tighter financial conditions.

“With the ECB raising interest rates at a time when the demand environment is one that would normally see policy being loosened, higher borrowing costs will inevitably add to recession risks.

“One ray of light was a further marked cooling of inflationary pressures from the survey gauges of both
input costs and selling prices, which should feed through to lower consumer price inflation. However, at present, these inflation gauges remain higher than at any time prior to the pandemic, underscoring the unenviable challenge facing policymakers of taming inflation while avoiding a hard landing for the economy.”

About the Report

The Global Report on Manufacturing is compiled by IHS Markit based on the results of surveys covering over 13,500 purchasing executives in over 40 countries. Together these countries account for an estimated 98% of global manufacturing output2 . Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease.

Source: S&P Global

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