NL Update - Dutch manufacturing industry under pressure of higher interest rates
The Nevi Netherlands Manufacturing PMI dropped again in April, from 46.4 in March to 44.9 in April, showing that business conditions deteriorated further. New orders and output both fell faster, meaning that firms reduced output because of weak demand. Backlogs of work dropped at an even faster rate than in March, at a pace last observed during the pandemic and in 2012, after the financial crisis.
Even chip machine manufacturer ASML’s order book has dropped. The Dutch firm reported first quarter financial results on 19 April. Net sales were strong, at 6.7 billion Euro, but new orders dropped from 6.3 billion in the fourth quarter of 2022 to 3.8 billion in the first quarter of 2023. Some customers of ASML are adjusting the timing of investment in new machines, probably because of weak demand for semiconductors. Luckily, ASML has a very large order backlog of 38.9 billion, so the weak demand is not expected to affect output in 2023. ASML’s suppliers will also benefit from that.
Many Dutch firms, in particular in the machine industry, also have large order backlogs. This explains why both investment and consumer goods producers slightly increased their output in April, as evidenced by the Output Index. However, few firms’ order backlogs are as large as ASML’s, the only firm in the world that can produce the most advanced chip machines. If demand stays weak, many firms will probably reduce their output.
Industrial output on a whole still decreased in April, at an even faster rate than in March, because of a reduction of output at intermediate goods producers. This is in part explained by the fact that firms are still reducing inventory levels, also of finished goods. Another explanation is that the energy-intensive chemical industry still suffers from high energy prices. Prices of natural gas, an important energy source for Dutch energy-intensive firms, are still three times higher than two years ago, making it hard for producers of basic chemicals to compete with firms in other parts of the world.
High energy prices weigh on chemicals
The drop of the headline PMI was partly driven by shorter suppliers’ delivery times, which improved to the greatest extent in the history of the Nevi PMI since 2000. Supply chains are functioning normally again, and weak demand makes it easier to get orders delivered fast. Input prices fell at a faster rate in April, signalling that inflation has peaked.
Inflation is not under control yet, however. While the manufacturing sector is contracting, the services industry is more resilient thanks to strong demand. ABN AMRO expects that a mild recession is needed to bring inflation sustainably back to target, and that central banks will increase interest rates further. We expect that the European Central Bank (ECB) and the Federal Reserve (Fed) will start lowering interest rates in December, which would stimulate the economy and lead to stronger demand for investment goods.
In the meantime, demand for industrial goods might remain weak, although it might increase slightly when firms have finished reducing their inventories.