German manufacturing continues its strong recovery

The rebound in the German manufacturing sector gathered momentum in October, as highlighted by the fastest increases in output and new orders for 16 and 26 months, respectively. Robust rises in production and incoming new work signaled that the sector continued to recover strongly from the steep retrenchment seen during the fourth quarter of 2008 and the first half of 2009.

A further improvement in demand also contributed to a moderate increase in backlogs and the slowest drop in employment levels for 11 months. However, companies remained cautious regarding input buying and stock levels. October data showed that both inventories of purchases and finished goods fell sharply over the month.

The headline seasonally adjusted Markit/BME Purchasing Managers’ Index (PMI) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – registered 51.0 in October, up from 49.6 in September and above the neutral 50.0 mark for the first time in 15 months. The earlier flash figure for October was 51.1. The final PMI reading was the highest for 16 months, reflecting a combination of stronger output and new order growth, alongside slower job shedding and longer delivery times from suppliers.

Production in the German manufacturing sector has now risen for four consecutive months, supported by improving global economic conditions and an associated upturn in client demand. The latest increase in output was the strongest since June 2008. October data indicated that the overall expansion was driven by robust growth in intermediate and investment goods sectors, which were also the areas of production hit the hardest at the height of the downturn.

Manufacturers indicated a strong rise in new order volumes compared to one month earlier. This was attributed to improved confidence in the economic outlook and, in some cases, the completion of contracts that had been delayed earlier in the year. Companies also noted that substantial price discounting supported sales in October. Data indicated that new export orders increased solidly, with a number of firms citing improved demand from China and Eastern Europe.

Job cuts persisted in October, largely reflecting ongoing staff restructuring in the manufacturing sector. Lower workforce numbers have now been recorded for thirteen successive months, but the latest fall was the slowest since November 2008.

Average input prices fell only slightly in October and at the slowest rate in the current 12-month period of decline. Lower purchasing costs were linked to the successful negotiation of discounts from suppliers. Meanwhile, manufacturers continued to reduce their charges in October, although at the least marked pace recorded so far in 2009.

Commenting on the final Markit/BME Germany Manufacturing PMI survey data, Tim Moore, economist at Markit, said: “The German manufacturing sector hasn’t really looked back since staring into the abyss at the start of the year, with the headline PMI moving up for nine months running since January and now above the neutral 50.0 mark. Output growth continued to strengthen in October, and the rise in the new orders index to a 26-month high suggests that the rebound has further to go. However, with PMI data tracking a fall in production levels for the calendar year of a much greater magnitude than the post-unification record in 1993, manufacturers continued to restructure workforces and cut capacity, contributing to a further sharp drop in employment numbers in October."