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German manufacturing sector sees sharp increase in job growth

Markit Research

December data signaled another strong acceleration in German manufacturing output growth, with the rate of expansion picking up to a five-month high. Sharper rises in production and incoming new work contributed to the fastest pace of job creation in almost 15 years of data collection.

The final seasonally adjusted Markit/BME Germany Purchasing Managers’ Index (PMI) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – registered 60.7 in December, little-changed from the earlier flash reading (60.9) and up from 58.1 in November. The final PMI reading was the highest since July and signaled a robust overall improvement in manufacturing sector operating conditions. The index has now posted above the neutral 50.0 mark for fifteen months in a row, with the latest reading well above the long-run series average (52.1).

December data showed that German manufacturing production increased at the fastest pace since July. Moreover, the current period of rising output levels now stretches to one-and-a-half years. The latest expansion of production reflected another strong improvement in new order books in the sector.

Growth of new work has accelerated in each month since the fourteen-month low posted in September. Reports from survey respondents suggested that improved business confidence amongst clients had boosted demand in December. Higher levels of new orders were also supported by the most marked rise in new export business for six months.

Employment levels in the German manufacturing sector increased for the ninth successive month during December. Moreover, the rate of jobs growth was the fastest in the survey history (exceeding the previous record high recorded in March 2008). Anecdotal evidence suggested that strengthening order books and greater confidence in the business outlook had resulted in higher staffing levels. Firms also cited efforts to raise capacity ahead of an expected increase in production requirements during the months ahead. Pressure on operating capacity was highlighted by a sharp rise in unfinished work in December, with the rate of backlog accumulation the sharpest since July.

Supply chain pressures remained evident in December, with lead-times from vendors lengthening at the fastest pace since August. There were a number of reports from survey respondents that raw material shortages and a lack of capacity at vendors had contributed to longer delivery times. As a result, some firms sought to build safety stocks of inputs, with pre-production inventories rising in December at a solid pace. This was supported by another sharp rise in the quantity of inputs purchased by manufacturers during the latest survey period.

Meanwhile, input cost inflation accelerated sharply and was the highest since July 2008. There were widespread reports of higher prices for chemicals, copper, plastics and steel. This led to a robust rise in factory gate charges, with the rate of inflation picking up to its sharpest since September 2008.

Commenting on the final Markit/BME Germany Manufacturing PMI survey data, Tim Moore, economist at Markit and author of the report, said: “December data confirmed a strong end to 2010 for the German manufacturing sector, with output growth accelerating throughout the fourth quarter. The impressive recovery in workloads continues to generate robust job creation in the sector, and the latest expansion of employment levels was the fastest since the survey began in April 1996. Staff recruitment and ongoing efforts to increase production capacity highlight that manufacturers are confident about the outlook for the year ahead. A return of strong input price inflation nonetheless presents a challenge to firms’ margins, as costs rose in December at a pace close to the peak seen during the 2008 oil price spike. This time around, higher costs have been accompanied by both a sharp rise in raw material purchasing and a substantial lengthening of supplier delivery times, highlighting that strong underlying demand may prevent a quick reversal of the pick-up in input price inflation.”

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