Grim times for Europe's manufacturers

Manufacturers across Europe suffered a disastrous March on the back of the COVID-19 pandemic, with economists warning there could be worse to come.

David Sapsted

1 April 2020

The Markit purchasing managers' index (PMI) for factories in the eurozone last month dipped to just 44.5 - its lowest in eight years - from 49.2 in February in an index where a reading under 50 signifies contraction.In the UK, the IHS Markit/CIPS PMI also showed that manufacturing recorded its worst reading since 2012, standing at 47.8, down from 51.7 in February.

Manufacturing employment levels drop across Europe due to Coronavirus

Employment in the sector fell across Europe as manufacturing output, new orders and exports fell at the fastest rate since the spring of 2009 when the global economy was in the throes of recession."Manufacturers also cut their employment levels over the month, with the net reduction in staffing numbers the sharpest recorded by the survey in over a decade. Job losses were especially acute in Austria, Germany and Ireland," said Markit.Neil Birrell, chief investment officer at Premier Miton, commented, “The economic data coming out of Europe this morning is not comforting, but that’s no surprise. Confidence about the future in Italy and Spain sank to levels not seen before, suggesting worse is to come."The UK, France and Germany showed similar traits. Equity markets in Europe will be under pressure, compounded by the UK banking sector cancelling dividends.”

COVID-19: the perfect storm for the manufacturing industry

The survey in the UK found that direct disruption from Covid-19 had created the "perfect storm" when combined with already low market confidence amid a slowing global economy."The effects were felt across most of manufacturing, with output falling sharply in all major sectors except food production and pharmaceuticals. The transport sector, which includes already-beleaguered car-makers, suffered the steepest downturn," said Rob Dobson, director at IHS Markit."With restrictions aimed at slowing the spread of the virus expected to stay in place for some time, expectations of further economic disruption and uncertainty meant business optimism slumped to a series-record low. However, on a slightly more positive note, manufacturers still expect to see output higher in one year's time."Economists warned that things might actually be worse than the latest PMI results showed, not least because most of the surveys were conducted before February 20, which was before more severe restrictions on movements were in force across much of Europe."The PMI likely greatly understates the pace of the downturn now under way in the manufacturing sector," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics."For a start, the PMI perversely is boosted by supply chain disruption - longer waits usually imply that demand has increased faster than supply, though that isn't the case at the moment."

Massive decline due to closed borders, lengthy shipping delays and reluctant clients

Duncan Brock, from the Chartered Institute of Procurement & Supply (CIPS), said that closed borders, lengthy shipping delays and reluctant clients had combined to lead to a massive decline and pushed business optimism to historical lows."The manufacturing sector was knocked sideways by the impact of Covid-19 and into contraction territory, experiencing some of the most challenging trading conditions since PMI records began," he said “With supply chains crumbling around the world, we can only expect a worsening outlook next month as increasingly necessary lockdown measures squeeze manufacturing production. Only creative and agile thinking, new products and approaches will see the sector through the turbulence ahead.”Seamus Nevin, chief economist at the manufacturers' organisation Make UK, added, “Today may be April Fool’s Day but this result is no joke. A PMI score of 47.8 amidst the ongoing Covid-19 outbreak is a sign of just how hard manufacturers have been hit. “Many firms have had to shut and lots of those that remain open have seen orders or output suffer. Others have switched to making products that are vital to the national attempt to stop the spread of the virus; a testament to why backing manufacturing is so important.“At the start of this year manufacturing companies reported unprecedented optimism about investment and trade but that had all been swept away by current events. With estimates suggesting up to a fifth of smaller firms could go out of business in the next few months Coronavirus has highlighted the need to maintain and develop our domestic manufacturing base."