Dutch manufacturing sector reduces output and jobs amid further drop in business activity
Business activity in the Dutch manufacturing sector is deteriorating further. The Nevi Netherlands Manufacturing PMI has dropped from 45.9 in August to 43.6 in September, the lowest score since May 2020. The situation is not as bad as at the start of the pandemic, when supply chains ground to a halt, but it is clear that the downturn in manufacturing is far from over.
Output, new orders and backlogs of work all declined quickly. Business activity keeps dropping. Output prices also fell at pace. In part, output prices are dropping because firms are passing on lower input costs for energy and materials. However, competition is also increasing, forcing some firms to lower their prices.
The restrictive monetary policy of the central banks has a great impact on the manufacturing sector. High interest rates make financing industrial goods more expensive. This leads to lower demand for both semi-finished and finished goods, such as machinery. High inflation and high interest rates lead to slower economic growth. This is causing a sharp drop in demand for industrial goods. Due to the weak demand, prices are also dropping. Higher interest rates, both short-term and long-term, seem to have a great impact on the prices of industrial goods.
Firms cut costs
Many firms are cutting costs. Firms are still reducing inventories in order to improve their cashflow, although the inventories of finished goods increased somewhat. In September, most firms have reduced their quantity of purchases even further. Notably, a sizable proportion are cutting jobs. Many firms are not extending temporary contracts. This is somewhat surprising, because so far, most employers have tried to maintain their staff because of the tight labour market. Most firms are probably pessimistic about the coming months. This confirms our impression from conversations with clients.
ABN AMRO does not expect strong recovery of demand for industrial goods in the short-term. First, inflation needs to be under control, so that central banks can lower interest rates. For this year, we forecast a drop in Dutch industrial output by 7.5 per cent. We do not expect demand to really improve before next year.