Germany manufacturing remains solid; PMI up to 57.0

The seasonally adjusted Royal Bank of Scotland/BME Purchasing Managers’ Index continued to signal a robust overall expansion of the German manufacturing economy, with all five component indexes exerting positive influences on the headline figure in April.

After falling for three consecutive months at the start of 2007, the PMI – a composite index designed to provide a single-figure measure of operating conditions in the manufacturing sector – rose slightly to 57.0 in April, from 56.9 in March. This marks the 20th consecutive month in which the index has remained above the 50.0 no-change value.

“April data signaled that the German manufacturing economy maintained its impressive performance so far in 2007, reflecting favorable market conditions and healthy order books across the sector,” said Achim Klüber, RBS country head for Germany. “Output growth continued to ease, but the composite PMI edged up and remained at an elevated level. Overall, the outlook for the sector remains positive, with further robust rises in new orders, employment and work-in-hand providing the momentum for production growth in the months ahead. However, the slowdown in exports growth is noteworthy and will need to be monitored very closely given that so much of the German recovery has been dependent on the external sector. Some of this slowing in external demand could be the result of the exchange appreciation.”

Production levels continued to rise at a strong pace, but the rate of expansion eased for a fourth month running to its lowest since December 2005.

Output growth was closely linked to favorable economic conditions and rising levels of new business. German manufacturers also indicated healthy growth of new export orders in April, although the latest improvement of new business from abroad was less marked than the average for the current 45-month period of expansion.

Firms noted that strong new order growth and, in some cases, a lack of spare capacity at their plants (reflecting high rates of resource utilization) had led to backlog accumulation.

In response to rising workloads, German manufacturers again sought to raise production capacity by taking on extra staff. Employment growth remained broad-based in April, with investment goods producers indicating the sharpest increase.

Bottlenecks and capacity constraints at suppliers led to a further marked deterioration of vendor performance. Longer average lead-times for key raw materials (particularly steel) encouraged firms to build buffer stocks and replenish pre-production inventories.

Although slightly below the average for 2007 so far, sharp input cost inflation persisted in April. In response to higher raw material costs, German manufacturers reported a solid increase in factory gate prices, but the rate of inflation eased to a six-month low.