Eurozone Manufacturing Growth Slows Again at Start of Q2

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The start of the second quarter saw a further slowing in the rate of growth in the eurozone manufacturing sector. The final IHS Markit Eurozone Manufacturing PMI fell to a 13-month low of 56.2 in April, down from 56.6 in March and slightly above the earlier flash estimate of 56.0. Although still signalling a solid rate of expansion, the upturn has lost noticeable momentum since the PMI hit a record high in December 2017.

Key findings:

• Final Eurozone Manufacturing PMI at 56.2 in April (Flash: 56.0, March Final: 56.6)
• Slower rates of expansion in five of the eight nations covered      
• Slower increases in new work and employment offset slightly stronger gain in output 

Data collected April 12-23

Five out of the eight nations covered (the Netherlands, Germany, Italy, Spain and Greece) registered slower rates of growth than in the prior month. The pace of expansion was unchanged in Austria and improved in both France and Ireland. The top-three performers remained the Netherlands, Germany and Austria.

Sub-sector data indicated that the slowdown was mainly centred on the intermediate goods industry, although there was also a mild softening in the rate of growth at investment goods producers (which remained the top-performing sector). The rate of expansion in the consumer goods sector ticked higher, but remained below the other two categories.

The weaker growth signalled by the headline PMI was mainly due to slower (yet still robust) increases in new orders and employment. In contrast, output rose at a slightly faster pace than in March.

Intakes of new work expanded to the least marked extent since November 2016, in part reflecting a slowdown in the pace of increase in new export orders* (also to a 17-month low). Some firms linked this to the recent strengthening of the euro exchange rate, especially against the US dollar. Growth of new export orders slowed in almost all of the nations covered, the only exceptions being slight improvements in Germany and France.

Manufacturing employment rose for the forty-fourth month running in April. Although the rate of job creation eased to its lowest since last August, it remained well above the long-run survey average. Companies attributed the sustained increase in staffing levels to solid growth of new orders and output, alongside a continued accumulation of backlogs of work (a by-product of robust demand testing capacity).

All of the nations covered by the survey reported an increase in employment during April. The strongest expansions were registered in the Netherlands, Austria and Germany, and the weakest in Spain. Only two countries – France and Austria – saw faster job creation than in March.

The rate of input price inflation faced by euro area manufacturers remained substantial in April, despite easing to an eight-month low. Higher costs reflected ongoing rises in commodity prices, in some cases exacerbated by supply-side constraints such as raw material shortages. These constraints also impacted on the performance of suppliers, with average vendor lead times again lengthening to one of the greatest extents in the survey history.

Part of the increase in purchase prices was passed on to clients in the form of higher output charges in April. Moreover, the rate of selling price inflation edged up from March’s three-month low. All of the nations covered registered an increase in charges, with the steepest seen in Germany and the weakest in Greece.

The outlook for the eurozone manufacturing sector remained positive in April, with companies expecting (on average) output volumes to be higher in one year’s time. That said, the degree of positive sentiment dipped to a 16-month low, reflecting more subdued confidence in six of the nations covered (the exceptions being improved positivity in Germany and Greece). 

Comment

Commenting on the final Manufacturing PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

“The manufacturing sector saw growth weaken further at the start of the second quarter, but let’s not lose sight of the fact that the overall pace of expansion remains encouragingly solid.

“Although growth has slowed markedly compared to the start of the year, December had seen the best performance in over 20 years of survey data collection, with factory activity clearly surging at an unsustainable rate. Since then, supply constraints – including raw material scarcities, supplier delivery delays and skill shortages – have constrained production. Strikes, bad weather and unusually high levels of illness have also plagued businesses.

“Some of these adverse factors are therefore likely to be reversed in coming months, as capacity is increased, supply improves and factors such as strikes and weather cause fewer problems.

“However, anecdotal evidence from the surveys also highlights how demand has been curbed by other issues such as the stronger euro and rising prices. Uncertainty has also intensified due to worries regarding trade wars and Brexit, underscoring downside risks to the outlook.

“While the current pace of growth remains solid, the trend in the surveys in coming months will provide important clues as to the degree to which underlying demand may be waning and the extent to which policymakers should be concerned about the health of the economy.”