European manufacturing’s bounceback from its pandemic-induced crash this spring is slowing — and in Germany, the region’s industrial heartland, executives worry that the recovery could soon run out of steam, leaving them with years of painful rebuilding ahead.
Manufacturing activity and output in the eurozone continued to rise in August, according to the IHS Markit flash purchasing managers’ eurozone manufacturing index published on Friday, but at a slower rate than in previous months.
While German manufacturing activity continued to increase, there was a surprise contraction in France and some economists expect to see a softening in Italy and Spain when their sentiment data is published next week.
This suggests that although eurozone factory production, orders and exports data all rebounded sharply in June, they are likely to have lost some momentum over the course of the summer.
High-frequency data such as heavy goods traffic on German toll roads — which are more up-to-date than official economic indicators but are experimental and the extent to which they reflect subsequent trends in official data is variable — have returned close to pre-crisis levels.
However, industrialists and economists worry that the rebound may soon fade.
Most investment budgets will be even lower in 2021 — they are going to be cut really hard again — so this is not going away
“We have seen some figures recently that surprised on the upside, but it is not the moment to get carried away,” said Katharina Utermöhl, economist at Allianz. “May to July (was) the honeymoon phase of the recovery. On the industry side it is being driven mostly by pent-up demand.”
Henrik Follmann, chief executive of family-owned German chemicals maker Follmann Chemie, said that “the trend is going in the right direction but the confidence is missing”.
“Big orders are not coming and the clients are not building up their inventories,” he said.
Follmann Chemie, which supplies adhesives, inks and coatings to the packaging, construction and industry sectors from its base near Hanover, is enjoying a jump in pricing that its boss says is “an indicator that demand is getting back closer to supply”.
Yet Mr Follmann added that sales were still heavily down and many clients were struggling. “The furniture industry is picking up but the car industry is still difficult,” he said. “We need confidence. People have to start buying cars or kitchens again. This is still not happening. Watching the figures on coronavirus infections going back up again — that doesn’t help.”
The 22.5 per cent rise in industrial production across the eurozone in May and June only clawed back part of the record 28 per cent drop in output suffered in the first two months of the pandemic, when many factories cut back production or closed during lockdown. By June, industrial output was still 12 per cent down on the same time last year.
Germany’s central bank said last week that, despite the recent rebound, eurozone manufacturers were only operating at 72 per cent of their total capacity in July — well below their long-term average of above 80 per cent.
One of the hardest hit sectors has been the carmaking industry, which directly employs 830,000 people and supports a further 2m jobs while accounting for about 5 per cent of Germany’s total economic added value.
IHS Markit forecasts that global car sales will fall from 88m last year to 69m this year. Markus Duesmann, head of Audi, has predicted that pre-crisis levels of car production will “not be reached before 2022 or 2023”.
Elmar Degenhart, chief executive of German car parts maker Continental, is even more pessimistic. “There will not be a fast recovery, neither in Europe nor in North America,” he said. “The number of cars being produced around the world is increasing, but slowly. We will not achieve the level of 2017 until after 2025 at the earliest.”
ElringKlinger, a maker of gaskets and plastic panels for cars based near Stuttgart in south-west Germany, suffered a more than 50 per cent drop in sales in the weeks after the pandemic hit.
Stefan Wolf, ElringKlinger’s chief executive, said that in recent weeks there were signs of a bounceback, particularly in sales to China and the US. “We clearly see a recovery in June and also in July,” he said. “There is also a pretty good situation in August, based on the daily reports I get.”
However, the European car market remained in the doldrums, he added. “People here in Germany or other European countries are in short-time work and they don’t really know if they will still have a job in six months’ time, so there is no real recovery here in Europe and it is really wait-and-see.”
Mr Wolf, who is also head of the metal and electrical industry employers’ association for south-west Germany, worries about the wider outlook for the country’s many machinery makers, which are being hit by sharp cuts to companies’ investment budgets.
“Most machinery companies are having trouble because a lot of investment projects have been cancelled or delayed,” he said, adding that ElringKlinger had cut its investment budget from more than €160m in 2018 to about €30m this year. “Most investment budgets will be even lower in 2021 — they are going to be cut really hard again — so this is not going away.”
The woes of the export-reliant manufacturing sector have been worsened by the recent appreciation of the euro, which is up about 4 per cent against a trade-weighted basket of currencies since May.
Exports from the eurozone rose almost a third between May and June, although they remain 10 per cent below the level of a year ago. “The strong euro is a disadvantage for exports, as are trade difficulties and tariffs,” said Mr Wolf.
An additional setback is the impact of coronavirus on international travel, which makes agreeing big contracts harder, according to Mr Follmann.
“Our travel spending is down 90 per cent — that’s a very negative sign — because you need to be there,” he said. “We are working with one hand behind our back. You learn to do more with the other hand, but it is still not ideal.”
Additional reporting by Joe Miller