German industry faces fastest downturn since April, PMI drops to 43.5

The PMI index for German industry fell to 43.5 points in June from 45.4 in May, signaling the fastest economic downturn since April. S&P experts note a decline in production, orders, and employment, along with an accelerated reduction in inventory.

On Monday, readings from various European countries—France, Poland, the eurozone, and Eastern Bloc countries—were reported. S&P also released data on Germany. The latest PMI reading indicates a worsening crisis in the German manufacturing sector. The report shows that the PMI index for industry fell to 43.5 points in June from 45.4 in May. This is the lowest reading in two months and is significantly below the 50-point threshold that separates economic growth from decline.

The main reason for the deteriorating situation was the accelerated decline in production. The production index fell to 45.1 points from 48.9 in May, marking the lowest level in three months. The downturn affected all three main industrial sectors: consumer, intermediate, and capital goods. The decline in production coincided with a sharp and accelerated decrease in the total number of new orders.

Surveyed companies pointed to weak domestic demand and decreased orders from other European markets and China. Exports fell faster than in May, though slower than the total number of new orders. The significant demand reduction contributed to the accelerated decline in production backlogs, as companies fulfilled orders faster than they received new ones.

Despite the difficult situation, the June survey showed the fourth consecutive monthly increase in German manufacturers' optimism about growth prospects over the next year. The level of optimism slightly exceeded the pre-pandemic average and was the highest since February 2022. Companies expressed hopes for increased exports, higher investments, and overall improvement in economic conditions over the next 12 months.

PMI data was traditionally commented on by Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, who stated:

Will this decline in production ever end? It will end, but apparently, it will take more time than expected. After we observed a softening of the production decline each month since March, the trend was finally interrupted in June.

In his opinion, the accelerated drop in new orders, especially export orders, indicates that Germany will have to wait a few more months before a recovery in the manufacturing sector occurs.

The expert also highlighted the worrying situation in the capital goods sector, the "pillar of German industry." De la Rubia noted that while this is only a monthly decline and should not cause excessive pessimism, it is concerning that the capital goods sector is moving away from the growth zone rather than approaching it.