Germany's manufacturing sector is experiencing deepening declines, according to the latest HCOB PMI® survey conducted by S&P Global.

Output, new orders, and prices have all seen significant drops, indicating worsening conditions. The HCOB Germany Manufacturing PMI® fell to 38.8 in July, the lowest reading since May 2020, highlighting a sharp decline in overall business conditions.

The decline is primarily driven by a sustained downturn in new orders, which experienced the most significant decrease in over three years. Weak demand has been observed across all categories of goods, with clients adopting a cautious approach and reducing their stock levels. Economic and geopolitical uncertainties, as well as tighter financial conditions, have also contributed to the decline in demand, leading to a sharp reduction in international sales.

Production levels have seen three consecutive months of contraction, reaching the fastest rate since the initial COVID-19 shutdowns in early 2020. Manufacturers are actively reducing backlogs of work, further highlighting the challenging environment. Expectations for future production have deteriorated for the third consecutive month, resulting in the first drop in workforce numbers since January 2021.

The survey also indicates a fall in average factory gate charges for the second consecutive month. Growing competition and easing underlying cost pressures have been cited as reasons for this decline. Input costs and output prices have fallen at the fastest rates since 2009, influenced by falling energy prices and a drop in raw material costs.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, expressed concerns about the significant fall in demand and highlighted the potential for a recession in the sector. He noted deflation in the goods sector driven by the drop in input and output prices. However, he also mentioned the improved delivery times as a positive signal for a return to normalcy in supply chains.

With increased risks in the second half of the year, the performance of the German manufacturing sector raises questions about the stability of the labor market. However, there is hope for a rebound next year if firms begin to rebuild their stocks. The focus now is on addressing the current challenges and creating a path to recovery in this uncertain economic environment.