Shrinking Manufacturing

Posted By Darren Winters on Feb 26, 2024

Shrinking Manufacturing

Shrinking manufacturing is underway in the eurozone’s largest economy, Germany where the sector is deep in a recession or a depression. 

German Manufacturing PMI collapsed to 42.3 (Jan 45.5), 4 month low, which is depression territory.

Anything under 50 is a contraction so with a worrying PMI of 42.3. Data tells a story. German manufacturing is de-industrialising, and that should not surprise anyone. An engine starved of fuel grinds to a halt. 

The impact of the Nord Stream pipeline sabotage is the deindustrialisation of German manufacturing. Germany is deep in recession and that is likely to have a huge impact on the eurozone economy, bearing in mind Germany is the largest economy in Europe and the third largest in the world. 

But the country is energy-poor and has no realistic alternative to a plentiful and affordable supply from its near neighbour in the east, Russia.

The service sector lags manufacturing by about three months. So declining manufacturing will eventually hit the euro service sector, which to date is showing some signs of robustness.

The service sector in the eurozone is the only bright spot. Eurozone Services PMI Business Activity posted 50 (January 48.4) a 7-month high. 

Shrinking Manufacturing

But if weakness in manufacturing continues that will eventually weigh on services too.   

Indeed, the Composite PMI for the eurozone shows the deepest contraction since 2013, if we exclude the pandemic lockdown months thatpersist into 2024, the rate of decline is showing signs of moderating.  

The ongoing war in Ukraine is showing no signs of abating and there is chatter of a new front spilling over into Poland. 

A wider war on the continent threatens seven decades of peace and prosperity in Europe, the continent’s golden years would be over. Moreover, the EU, as a political union, trading bloc and the single bloc currency, the Euro could be in jeopardy. No German trade surplus means no cheap recycled loans to finance the large trade deficits of the peripheral member countries in the south. The EU could be staring down the barrel of a magnified 2013 eurozone sovereign debt crisis. One that it may not survive.   

Shrinking manufacturing and service sector, unable to provide momentum

Flash PMI signals developed world contraction as higher interest rates exert a growing toll.

S&P Global showed the major developed economies collectively slipping into contraction for the first time since January. Falling business activity in the Eurozone and the UK and near-stalling US growth contrasted with robust growth in Japan underscored how tighter monetary policy in the West is dampening demand.

So, any hope that the service sector would be strong enough to pull shrinking manufacturing from its doldrums is evaporating. 

S&P Global showed the rate of contraction quickened. 

Europe’s largest economy, Germany has been in a downturn since the beginning of last year, and as noted since then, manufacturing has fallen into depression territory. 

Shrinking manufacturing due to waning demand

Wage increases in developed economies have not been enough to compensate for inflation, which is shrinking household budgets and crushing demand as inflation remains elevated.

China is one of Germany’s largest export markets. But China’s economy is slowing as well. 

Massive layoffs are being forecasted if a backlog of orders doesn’t support the existing workforce. 

The service sector always follows manufacturing with a two to three-month time lag. 

As long as we see global manufacturing continue to slow and global demand continues to fall, unemployment could rise. 

The service sector in the Eurozone is the only bright spot. Eurozone Services PMI Business Activity at 50 (January 48.4) 7 months high. 

But if shrinking manufacturing continues, it will eventually weigh on services

If there is no demand from somewhere in the world, then this is a transitory slowdown in a broader decline across all major economies. 

The manufacturing sector pays more than the service sector, so a decline in manufacturing means further falls in aggregate demand in the eurozone. 

Shrinking manufacturing UK contracting less

The UK manufacturing PMI posted 47.1 (Jan 47.0) 3 month high, which is just marginally higher.  

Backlogs also fell for the 10th consecutive month. 

A trend of falling backlogs leads to a cut in overcapacity and eventually a wave of unemployment. 

UK’s solid rate of service sector growth helps to boost UK private sector output in February.  

Flash UK PMI Composite Index at 53.3 9 months high 

The UK service was unchanged at 54.3 in January, showing a continuing expansion of the services sector.

The US is bucking the trend of shrinking manufacturing  

US Manufacturing PMI at 51.5 (January 50.7) at a 17-month high. Due to Geopolitics. The Red Sea affects higher shipping costs, making ordering from the US attractive.

Demand shifting from overseas factories to domestic US factories.

The US jobless rate declined to its lowest level in a month. 

Good producers signalled the steepest rise in new orders since May 2022 as customer demands improved for a second month running.  

US manufacturing is experiencing a renaissance as factories onshore reduce the risk of war, confiscation of property and logistic risks of cargo attacks. 

As noted in a piece entitled, US Manufacturing, dated September 2023,

“US manufacturing emerges after decades in slumber and could be a macro trend in its infancy as the Fed pivots from tightening to loosening monetary policy. 

The worst war in Europe since WW2, which shows no signs of de-escalation is not just benefiting the military-industrial complex, it could also be oiling the wider wheels of US manufacturing. 

US manufacturing emerges as the winner in a geopolitically unstable world,” Win Investing 

But there are no signs of a sizable rebound in the US economy, which is bucking the trend of shrinking manufacturing.      

Lengthy central bank restrictive monetary policy could also cause shrinking global manufacturing, a headwind on employment. 

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