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Growth of eurozone manufacturing cooled slightly in July after a
record-breaking expansion during the second quarter. Having beaten
prior records for a fourth straight month in a row during June to
reach 63.4, the IHS Markit's eurozone manufacturing PMI, fell back
to a four-month low of 62.8 in July. However, that was still higher
than anything seen prior to April in the survey's 24-year
history.
Some moderation from such elevated heights should therefore not
itself be a major concern. But a growing worry is that the July
survey brought further signs that manufacturers and their suppliers
are struggling to raise production capacity fast enough to meet
demand.
Although growth of demand has come off the boil slightly as the
initial boost from the reopening of the economy fades, the July
survey showed inflows of new orders outstripping production to an
unprecedented extent in the survey's 24-year history.
July consequently saw another near-record jump in backlogs of
uncompleted orders, and that's despite firms taking on staff at an
unprecedented rate in the survey's history during the month.
Output constrained by supply shortages
Many firms clearly want to produce more goods but are simply
unable to due to constraints. An analysis of reasons for production
falling by firms reporting lower output across the eurozone during
July show that some 47% attributed the decline to shortages of
components and other inputs. A further 3% reported that output fell
due to insufficient staff numbers. This suggests that half of all
cases of falling output were linked to supply side constraints.
Note that a further 4% reported that output had fallen as a result
of sales being hit by customers baulking at higher prices.
Sub-50 readings of the suppliers' delivery times index mean it's
taking longer for suppliers to provide goods to factories, on
average. This tends to result in higher prices, as manufacturers
are willing to pay more to ensure sufficient supplies of key
inputs.
The index is therefore inverted in the following chart, when it
is plotted again the eurozone manufacturing PMI input price index,
to show the strong correlation between supply conditions and price
trends.
Delta variant worries hit confidence and add to safety
stock buying
Mounting concerns about how the Delta variant poses a further
threat to supply chains and staff availability have meanwhile
helped push future growth expectations to the lowest so far this
year.
Safety stock building also remains widespread as speculation
about future supply difficulties remains rife, again linked to the
Delta variant and exacerbating the supply and demand imbalance.
Until supply chain security concerns can be alleviated, it is
likely that prices could remain high for many inputs as firms seek
to safeguard against future supply problems limiting production.
After all, one thing that the pandemic has reminded us of is that
the cost of having to shut an entire production line down due to a
lack of one key component will have a strong bearing on what a
manufacturer is prepared to pay for that component.
Chris Williamson, Chief Business Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
