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15 Month Contraction for EU Manufacturing

The health crisis affecting the entire world had bad timing for the Eurozone manufacturing industry. According to HIS Markit, the Eurozone Manufacturing PMI slumped to 33.4 in April, the fifteenth consecutive month of contraction.

The PMI releases (both for the services and the manufacturing sectors) are closely watched by market participants due to their simple interpretation. The 50 level is viewed as pivotal for the sector, marking either expansionary or contractionary territory.

In normal times, the PMI release rarely moves below 46 or above 54 – and even such levels are often considered extremes. But with economies in lockdown due to the coronavirus crisis, values like the one released today are not random.

What’s worrying is not the weak print. After all, anyone can understand that it is impossible for the sector to perform, considering the shutdown. But the fact that the decline continues a contractionary trend that started fifteen months ago. In other words, the European manufacturing sector was in bad shape even before the start of the coronavirus crisis.

What Next for the European Manufacturing Sector?

Markit began tracking the series in 1997, and today’s print is the lowest ever recorded. It follows a 44.5 print in March and surpasses prints we last saw during the 2008 financial crisis. From output to new orders and from export sales to purchasing activity, they all fell at record rates.

The hope is that April will go down in history as the lowest ever reading for a PMI release for the European manufacturing sector. With many economies on the brink of reopening, albeit gradually, the chances are that the sector will bounce too.

However, do not expect a V-shape recovery anytime soon. As the world learns to deal with the new reality posed by the coronavirus, globalization is likely to take a step back.

Disruptions in supply chains from Asia to Europe are likely to persist in the near future, making it difficult for companies in the manufacturing sector to compete as they did before the crisis. Europe, like other parts of the world, will be forced to reduce its dependency on Asia, despite higher manufacturing costs. Governments already stepped in providing financial assistance to the troubled sector, but in the end, the ability to compete locally and internationally depends on how the world exits the pandemic.

If April was the eye of the storm in terms of the virus’s impact on the economy, May’s data should see a bounce. Will this negative streak be broken?

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