German industry's fastest downturn since April sparks concerns

The PMI index for German industry fell to 43.5 points in June from 45.4 in May, indicating the fastest rate of economic downturn since April. Experts from S&P noted declines in production, orders, and employment, alongside an accelerated reduction in inventory.

On Monday, we received readings from many European countries - including France, Poland, the eurozone, and Eastern Bloc countries. S&P also released data on Germany. The latest PMI report signals a worsening crisis in the German manufacturing sector. The index dropped to 43.5 points in June from 45.4 in May. This is the lowest reading in two months, well below the 50-point threshold that distinguishes economic growth from decline.

The primary reason for the deteriorating situation was the accelerated decline in production. The production index fell to 45.1 points from 48.9 in May, marking its lowest level in three months. The downturn impacted all three main industrial sectors: consumer, intermediate, and capital goods. This decline in production coincided with a sharp and accelerated drop in new orders.

Surveyed companies indicated weak domestic demand and a decrease in orders from other European markets and China. Exports fell faster than in May, though this decrease was slower than the fall in new orders. Reduced demand led to a faster decline in production backlogs, as companies processed orders faster than they received new ones.

Despite the challenging situation, the June survey showed the fourth consecutive monthly increase in German manufacturers' optimism about growth prospects over the next year. The optimism level slightly exceeded the pre-pandemic average and was the highest since February 2022. Companies are hopeful for a rise in exports, increased investments, and an overall improvement in economic conditions over the next 12 months.

The PMI data was traditionally commented on by Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, who stated:

Will this decline in production ever end? It will end, but apparently, it will take more time than expected. After observing a softening of the production decline each month since March, the trend was finally interrupted in June—he writes.

In his opinion, the accelerated drop in new orders, particularly export orders, suggests that Germany must wait a few more months before seeing a recovery in the manufacturing sector.

The expert also highlighted the situation concerning the capital goods sector, the "pillar of German industry." De la Rubia noted that although this is only a monthly decline and should not cause excessive pessimism, it is troubling that the capital goods sector is moving away from the growth zone rather than approaching it.