Supply bottlenecks create record backlogs at eurozone manufacturers
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From shoemakers to car companies, the gap between the output of eurozone manufacturers and the orders they receive has widened to a fresh 24-year record because of supply chain disruptions, according to a closely watched business survey.
While Europe’s industrial companies reported continued strong growth in activity in IHS Markit’s monthly purchasing managers’ index (PMI) survey, they also complained of shortages of materials and delays to deliveries due to disruptions caused by the coronavirus pandemic.
The region’s manufacturers — in particular big carmakers — have struggled to keep up with rising global demand because of shortages of many materials, including semiconductors, metals, plastics and wood. Bottlenecks in container shipping have also crimped supplies.
“These supply issues were the primary cause of a shortfall of manufacturing production relative to orders of a magnitude not previously recorded by the survey, surpassing the 24-year record deficit seen in July,” said Chris Williamson, chief business economist at IHS Markit.
This is feeding into higher prices for many manufactured goods, which increased 2.7 per cent in the year to August, contributing to a recent surge in eurozone inflation to 3 per cent, its highest level for a decade.
The problems are weighing on the recent rebound in Europe’s export-focused economy. Jens Weidmann, head of Germany’s central bank, warned on Wednesday that “production in industry is being held back longer than initially thought by supply bottlenecks” and said this was likely to mean the Bundesbank would cut its German growth forecast for this year.
Big companies, including Siemens and Volkswagen, have warned that supply chain problems are likely to continue into next year.
VW’s main Wolfsburg plant, which employs 60,000 people, restarted after the summer break on only a single shift, while Audi, BMW and Daimler have sent thousands of workers home because of production stoppages caused by the chip shortage. Adidas and Puma have been hit by plants being closed in Vietnam because of restrictions to combat rising Covid-19 infection levels.
Frederik Ducrozet, an economist at Pictet Wealth Management, said disruption to supply chains would push up the price of about a third of the basket of products used to calculate eurozone inflation at least until next year. “The risk is that inflation expectations adjust higher,” he said.
Factory gate prices “rose steeply once again” Williamson said, albeit at a slower pace than in recent months. IHS Markit’s input prices index remained high, at 87.0, although it was down from July’s record of 89.2.
Katharina Utermöhl, an economist at Allianz, said the supply bottlenecks should mostly fade away once the economic rebound flattens out and the supply of key materials increases. “Apart from certain important pockets like chips, we don’t see a reason why supply will not catch up with demand,” she said.
Eurozone manufacturers responded to rising demand by adding more workers in August, according to IHS Markit, continuing the positive job creation trend that started in February.
The number of unemployed people in the eurozone fell 350,000 to 12.3m in July, reducing the bloc’s jobless rate to 7.6 per cent, according to figures published by Eurostat on Wednesday. The rate is down from 8.5 per cent last year but is still below the pre-pandemic low of 7.1 per cent and millions of furloughed workers are excluded from the figures.
The overall PMI score for eurozone manufacturing fell to a six-month low of 61.4 in August but remained well above the 50 level that indicates a majority of businesses are reporting growth in activity from the previous month.
Activity increased at a higher rate among Italian and Spanish manufacturers, but slowed at German and French ones while remaining at a high level of growth. “Eurozone manufacturers reported another month of buoyant production in August, continuing the growth spurt into its 14th successive month,” said Williamson.