Who knows where the economy is going? Are we heading for growth, shrinkage or stagnation? Central bankers, economists, investors, entrepreneurs, politicians and other stakeholders looking for the answer to that important question often look to the mood among purchasing managers of a country’s industry. And this Monday no one was very happy about what those buyers gave.
The Dutch purchasing managers index, which is released on the first working day of the month, was 43.6 over the past month, a decrease compared to 45.9 in August, which indicates a faster contraction. Any figure above 50 indicates industry growth compared to the previous month, numbers below 50 indicate contraction.
The last time the Dutch index was this low – just above 40 – was a few months after the start of the corona pandemic. “The situation is not as serious as at the beginning of the pandemic, when supply chains came to a standstill, but it is clear that the malaise in the industry continues,” ABN Amro sector economist Albert Jan Swart wrote in an accompanying analysis.
Local industry buyers are also sending negative signals in other European countries. For the entire eurozone, the ‘Purchasing Managers Index’ (PMI) stood at 43.3. In Germany the index even reached 39.6.
Diverse companies
The Dutch purchasing managers index has been maintained since 2000. Every second half of the month, buyers from around 350 different Dutch industrial companies receive exactly the same questions about the activities of the company they work for. This concerns a variety of companies: clothing company, publishing house, chemical manufacturer, machine manufacturer or maker of buses and cars.
The buyers can give three answers: higher, equal, or lower. If the majority of the answers are lower, the index will be below 50, and vice versa. New orders and production weigh most heavily (30 and 25 percent), followed by employment (20 percent), delivery times (15) and purchased materials (10 percent).
“Purchasing managers of manufacturers have a special insight into the economic cycle,” Swart from ABN Amro explains over the telephone. “They have to estimate very carefully what the factory will need to produce in the coming months – often the raw materials or semi-finished products required for this have a delivery time of a few months, so they must be ordered in time to keep the factory running. In the past, buyers’ estimates have provided a good indication of the final actual production.”
The answers from purchasing managers in September indicate that production, the number of new orders and the number of open orders are declining rapidly. According to Swart, the monetary policy of the European Central Bank, which has rapidly raised interest rates to curb inflation, has a major impact on the industry. “The higher interest rates make the financing of both semi-finished products and capital goods such as machines and transport equipment more expensive. High inflation and high interest rates lead to a slowdown in economic growth, resulting in a sharp decline in demand for industrial products.”
Purchasing managers also hint that their companies are watching costs. Companies consume their stocks in order to free up money.
According to Swart, it is also striking that companies are now also cutting their personnel costs: jobs are being eliminated. “Many companies do not extend temporary contracts. This is striking, because due to the tight labor market, employers do not simply let their staff go.” This indicates that the majority of entrepreneurs are pessimistic about the coming months. “The malaise comes at a bad time, because wage costs are rising sharply due to the rapid increase in the minimum wage and collective labor agreement wages.”
12 percent of GDP
The fact that the mood among industry buyers is usually such a good indicator for the rest of the economy is special because the sector, with more than 12 percent of the gross domestic product, is certainly not the largest sector of the Dutch economy. This is the commercial services sector, such as transport, catering, IT companies and business service providers, with more than 50 percent.
However, according to Swart, the industry is a sector that responds quickly to economic developments. “Producers quickly suffer from slowing economic growth or tighter monetary policy.” In the past, you saw that industry followed the services sector – up or down.
“Now there is an unusually large difference with the service sector. This is because the industry continued to operate reasonably well during corona, while the catering and business services industry came to a standstill. Since last summer, the service sector has been catching up, while industry has been hit by high energy costs and interest rates.”
However, Swart sees that the growth of the services sector is now also starting to slow down. “Among other things, because the catch-up effect after the pandemic is over and consumers are starting to keep more control over their budget due to high inflation. Some parts of the service sector have been performing poorly for some time, such as the temporary employment market and freight transport.”