Dutch industrial production grows narrowly in January

The shorter suppliers' delivery times weigh heavy on the headline score. Usually, longer suppliers' delivery times are a sign of growth. Increasing business activity leads to increased demand for materials, which leads to longer delivery times. Under normal circumstances, shorter delivery times are a sign of weak demand for materials and thus weak business activity. This is why shorter delivery times lead to a lower headline PMI, which is calculated based on New orders (30% weight), Output (25% weight), Employment (20% weight), Suppliers' Delivery Times (15% weight) and Stocks of Purchases (10% weight).

Shorter delivery times are good news

While the shorter delivery times are still a sign of weak business activity, recent circumstances have been far from normal. At the moment, shorter delivery times are actually good news. Excluding suppliers' delivery times, the NEVI Netherlands Manufacturing PMI for January would be 49.9. During the pandemic, dozens of millions of consumers - locked down, bored, and paid with government aid - purchased unusually large amounts of goods, which led to a sudden increase of demand for industrial goods. Lockdowns of factories and container terminals, and longer waiting times during loading and unloading increased amounts of cargo, disrupted production and logistics, making it impossible to meet the high demand, which led to the worst shortages of materials on record. High container shipping rates and material shortages spurred inflation, forcing central banks to step in and raise interest rates to cool inflation. Just when the global economic outlook turned bleak due to the energy crisis following the Russian invasion in Ukraine, fast rising interest rates made it more expensive to finance inventories, previously purchased materials finally arrived at the buyers, leading to large excess inventories. This perfect storm thus led to an extremely large 'bullwhip effect', the phenomenon that temporarily high demand, combined with long lead times, leads to excess inventories which firms then start to unwind.

Excess inventories almost run down

The unwinding of excess inventories explains a good part of the very weak demand last autumn. Even though the current 'bullwhip effect' is probably by far the most severe in history, it is still a temporary phenomenon. As soon as excess inventories are cleared, demand can improve. While new orders were still declining in January, the rate of deline was the slowest since August. Quantity of purchases and stocks of finished goods still declined too, but only marginally, and input and output prices are rising at slower rates, signaling cooling inflation. This suggests that firms have almost cleared their excess inventories, and the worst of the bullwhip is behind us.

Unfortunately, two big names in the Dutch manufacturing sector filed for bankruptcy in January. In the paper industry, a sector hit hard by the energy crisis, Crown van Gelder suffered from a sudden stop of new orders and halted production. The car manufacturing start-up Lightyear, too, might have fallen victim to the pandemic bullwhip. The car industry has been hit very hard by material shortages, and weighed heavily on production, even at the established leaders of the industry, let alone a small new player.

While the energy-intensive industries such as the paper industry, basic metal and basic chemical industry are not out of the woods yet, the energy crisis is much less severe than a few months ago. Some factories that have halted production last summer might even restart soon. At least, for most of the Dutch manufacturing sector, the outlook has clearly improved.