Europe's industrial sector remains mired in a nearly two-year crisis. The euro zone PMI index fell to 45.7 points from 46.1 points in March. This latest result is the lowest level in four months and shows the situation in manufacturing activity is deteriorating. Notably, the index has remained below a neutral 50 points for 22 consecutive months.
Manufacturing industry is struggling
What will save the euro area economy? It's a difficult question, but one thing is for sure: it's definitely not manufacturing, said Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
The first month of the second quarter did not show the much-awaited improvement. The pace of decline in production is the slowest in more than a year, which is encouraging but still highlights the vulnerability of manufacturing across the eurozone. Without growth, we welcome slow decline.
Unfortunately, there is little reason for optimism. New orders fell sharply in April compared to the previous month, despite the current decline in production weakening. Export orders from each country decreased particularly sharply.
As new orders plummeted, manufacturers cut back on purchasing activity and relied on inventories built up during previous boom years. Dr. Della Rubia said these inventories have been declining for the past 15 months, and the inventory cycle shows no signs of recovery.
While shorter delivery lead times are a positive development for manufacturers, they reflect lower demand for goods and production inputs. Manufacturers' operating costs decreased slightly, and final product prices fell for the 12th consecutive month.
Continued negative trends in European industry continue to impact employment. Production companies are planning further job cuts, albeit at a slower pace. Business confidence improved for the second consecutive month, reaching the highest level since February 2022.
role reversal
Southern European countries have led the way in industrial performance in recent months. This marks a change from the past decade or two, when these countries lagged behind Europe's economic growth. Both countries are now in the lead, but those that have criticized their economic policies in the past are now feeling the slowest slowdown.
In April, Greece (55.2 points) and Spain (52.2 points) both recorded an increase in industrial activity (PMI index above 50). But Greece is showing signs of fatigue with its worst result in three months. Meanwhile, Spain reported its best result in 22 months.
The Netherlands defended their Nordic title with 51.3 points, their best result in 20 months.
However, these three countries were unable to move the euro area towards growth. Germany (42.5 points), France (45.3 points), and Italy (47.3 points) are all well below 50 points, and the outlook remains grim.
Germany's challenges continue
The current state of Germany's industrial sector deserves close scrutiny.
The German industrial PMI index in April improved slightly to 42.5 points from 41.9 points in March. Nevertheless, it remains well below the neutral 50-point level. Although the improvement in April was helped by a slowdown in the decline in production, new orders continued to decline and reached their lowest level since November of last year. This was primarily due to high customer inventory levels and lack of demand for capital goods.
Interestingly, however, the decline in new export orders was the lowest in a year. This bodes well for Polish airlines, which frequently fly routes between Germany and neighboring countries.
Nevertheless, similar trends are observed in Germany as in the euro area, with reduced purchasing activity, reliance on inventories, shorter lead times, and lower production costs and final prices.
Production input prices fell by the largest amount in 14 months in April due to rising costs for some chemicals and metals, but finished product prices fell by the largest margin since September 2009.
German producers' optimism about the next 12 months rose for the second month in a row, to the highest level since April 2023.
germany loses advantage
Dr. Della Rubia is less optimistic. He pointed out that new orders in Germany are much lower than the euro area average. He said the slowdown in China's economic growth was also having a negative impact on Germany's exports, and that China now competes with Germany in the areas of automobiles and mechanical products that Germany once dominated.
But he also believes that German industry could return to growth in the second half of this year due to improved global economic conditions.
Poland's PMI is declining
Poland experienced a nasty surprise as its PMI index fell by more than 2 points in April. The index fell from 48 in March, close to the neutral 50 point threshold, to 45.9 in April. This drop was the largest since July 2022.
This is the 24th consecutive month the index has been below 50, the longest period since Poland's PMI index was first tracked in 1998.
Four of the five sub-indices – new orders, employment, delivery times and inventories – fell. Production was the only stable sub-index.
New orders have declined for the 26th consecutive month, the longest period on record. Demand in Japan and major overseas markets, particularly Germany, France and Italy, was weak, with April's drop being the largest this year.
Industrial employment has been declining for 23 months, the longest decline in 20 years. April's rate of decline was the largest in five months.
As in the euro area, producer purchasing activity and inventory levels declined, and prices also fell.
Polish manufacturers remain optimistic about the next 12 months, expecting improved market conditions and increased exports, although growth expectations are at their lowest in six months.
Trevor Balchin, economic director at S&P Global, said: “While Poland's April data was generally weak, preliminary eurozone figures show that Europe's overall output has increased for the second consecutive month and Germany has returned to growth. “It offers a glimmer of hope that demand may soon recover.” Market intelligence.
Expected to recover in the second half of the year
Hopes for a recovery in Poland and Europe will likely have to wait until the second half of the year.
Dr. Della Rubia said the current situation in the industrial sector, with lower orders and reduced purchasing activity, suggests that the recovery will be delayed until at least the summer.
Experts from Hamburg Commercial Bank point out that economic recovery usually begins with positive signs in the capital goods sector.
“These products struggled in April as demand fell in the three largest eurozone countries,” he said.
Dr. Della Rubia is hopeful that the positive developments in the global economy will spread to the eurozone, allowing less developed countries such as Germany, France and Italy to catch up with the leading European countries.
