Supply chain, inflationary pressures temper eurozone, UK manufacturing recovery

Author: Will Beacham

2021/08/02

LONDON (ICIS)--New purchasing manager indices (PMIs) for the eurozone and UK show continued resilience in manufacturing across the region, but with inflationary price pressure caused by disrupted supply chains and backlogs of orders.

Final eurozone IHS PMI for July reached 62.8, slightly down from 63.4 in June and the lowest since March. The sector has now recorded successive months of expansion since July 2020, with the latest reading only slightly below June’s record high.

A reading above 50 indicates expansion in manufacturing activity, while below 50 indicates contraction.

With the exception of Germany, there was a broad decrease across the national PMIs in July. But across the board expansions were still historically sharp.

The survey’s output index also slowed, signalling the softest increase in eurozone production since February.

The recovery in demand, which started in the second half of 2020, continued through July. The rate of growth in new business was steep and held close to March’s survey record. New export orders also expanded sharply, though at the weakest rate in five months.

Strong order books contributed to a growing backlog of work across the eurozone. Companies responded by hiring additional staff at a rate unseen in 24 years of data collection by IHS. Job creation was especially strong in Germany and Austria.

INPUT LEAD TIMES MUSHROOM
Chemical markets have faced supply chain disruption since the second half of 2020 as the global container shipping system could not cope with a strong rebound in economic activity and demand. Further disruption was caused by the US polar storm, closure of the Suez Canal and a resurgent COVID-19 pandemic, with more lockdowns in China and across Asia.

The new PMI data indicates this disruption persists across Europe’s manufacturing sector. Input lead times lengthened in July to one of the greatest degrees ever recorded by the survey. As a result, inventories were run down with warehoused goods being used to satisfy orders.

INFLATION STALKS EUROPE
Disrupted supply and strong demand pushed input costs and output prices up by record amounts in July.  Cost inflation accelerated to fresh highs in many countries including Austria, Germany and the Netherlands.

Output charges across the eurozone have risen for ten consecutive months.

OUTLOOK LESS OPTIMISTIC
Eurozone manufacturers were still optimistic for continued recovery from the pandemic, though the level of optimism slipped to a seven-month low.

Chris Williamson, Chief Business Economist at IHS Markit said: “The July survey also brought further signs that manufacturers and their suppliers are struggling to raise production fast enough to meet demand, driving prices ever higher.

He added that capacity constraint indicators continue to flash red with input shortages worsening at a near record rate with another near-record rise in backlogs of work.

“Safety stock building also remains widespread amid ongoing speculation about future supply difficulties. Mounting concerns about how the Delta variant poses further threats to supply chains and staff availability have helped push future growth expectations to the lowest so far this year,” according to Williamson.

UK LABOUR SHORTAGES, SUPPLY CHAINS CONSTRAIN GROWTH
The UK PMIs for July show how labour shortages and supply chain disruption have pulled back growth in manufacturing orders and output from record highs.

The seasonally adjusted IHS Markit/CIPS PMI slipped to 60.4 in July, down further from May's record high of 65.6. The PMI has signalled expansion for 14 months.

Domestic orders and new business grew strongly as the economy reopened. Exports also grew strongly, driven by sales to the US, EU, China, Russia and the Middle East. Some survey respondents noted that Brexit issues constrained exports to the EU.

UK purchasing managers grew their orders, with concerns about security of supply caused by shortages of staff, raw materials and finished goods.

Supplier lead times increased substantially in July thanks to logistic delays caused by stretched international supply chains. Raw material shortages, disruption caused by COVID-19 and Brexit plus capacity issues across the distribution network (including delays at ports, freight and shipping services) also contributed to delivery delays.

Inflationary pressures are also building in the UK, with input costs and output prices rising at near record levels in July.

Across Asia, latest PMI data for July shows growth stalling as more lockdowns and supply chain disruption take their toll.

Pictured A Mercedes-Benz factory in Kecskemet, Hungary. Source: Sandor Ujvari/EPA-EFE/Shutterstock