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Final PMI survey data for June point to falling manufacturing
output in second quarter
Subdued forward-looking indicators suggest no imminent end to
downturn
Cost-cutting increasingly evident as firms trim staff
Input prices fall for first time in three years
Eurozone manufacturing remained stuck firmly in a steep downturn
in June, according to the latest PMI survey data, continuing to
contract at one of the steepest rates seen for over six years.
Forward-looking indicators suggest no quick end to the downturn.
Companies meanwhile continued to focus on cost reduction, helping
push inflationary pressures lower.
Disappointing second quarter
The IHS Markit Eurozone Manufacturing PMI fell from 47.7 in May
to 47.6 in June, registering a deterioration of manufacturing
conditions for a fifth successive month. The disappointing survey
rounded off a second quarter in which the average PMI reading was
the lowest since the opening months of 2013. Comparisons with
official data indicate that the PMI is consistent with
manufacturing output falling at a quarterly rate of approximately
0.7%, thereby acting as a major drag on GDP.
The PMI has diverged from official data in recent months, but
the latter has shown considerable volatility, making short-term
assessment and forecasting difficult. The
three-month-on-three-month rate of change in the official data has
swung from signalling a 1.5% contraction in January to 0.8% growth
in both March and April 2019. The PMI suggests the official data at
the start of the year overstated the underlying weakness of the
manufacturing sector, but that the recent rebound has likewise sent
a misleading signal of health. Importantly, what the comparison
also reveals is that it would be unprecedented for the official
measure of manufacturing output to not weaken considerably in
coming months, given the current low PMI readings, and result in a
drop in second quarter output (
this is explored more fully in our recent research note).
Subdued forward-looking indicators
The downturn is also showing no signs of any imminent end. The
PMI survey's forward-looking new orders to inventory ratio in fact
deteriorated in June and the future expectations index remained at
one of its lowest levels seen since 2012.
Although off recent lows seen earlier in the year, the subdued
forward-looking indicators add to concerns about the economy in the
second half of the year. A major concern is that, the longer the
manufacturing downturn persists, the greater the likelihood of the
weakness spilling over to services.
So far this year, the service sector has shown an almost
unprecedented resilience in the face of the factory sector's
downturn, supported in particular by consumer spending, and is
expected to help sustain GDP growth of just over 1% this year. A
spreading of the downturn to services would therefore raise the
risk of a slide into recession.
Cost cutting
Deteriorating inflows of new work meanwhile meant manufacturers
increasingly focused on keeping costs down, notably by cutting both
inventory holdings and staffing levels. Stocks of purchases fell
for a fifth straight month in June while employment levels were
reduced for a second successive month, in what is the first period
of job cutting for almost five years.
Lower prices
The downturn is also increasingly feeding through to lower
inflationary pressures, as producers and their suppliers competed
on price to retain customers and generate sales. In stark contrast
to the steep growth of producers' costs and prices seen at the
start of the year, the June survey showed that raw material prices
are now falling for the first time in three years and that selling
prices are barely rising.
A key gauge of underlying price pressures from the survey is the
suppliers' delivery times index. By providing a measure of how busy
suppliers are, this index gives insight into their pricing power.
Whereas the delivery times index was indicating widespread supply
delays and a commensurate build-up of price pressures throughout
last year, recent months have seen a swing to a buyers' market as
demand has weakened. Supplier lead-times in fact shortened in June
to the greatest extent since 2009. In this environment, suppliers
have been increasingly reported to have been offering discounts to
boost sales, suggesting prices could fall further in coming
months.
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.
