NL Update - Dutch industry sees sharp decline in order backlogs

There is also good news. For the first time since July 2020, a majority of the firms in the panel said that input prices have decreased. Costs are probably declining because of falling energy and commodity prices. This probably benefits energy-intensive industries, such as the chemical industry, basic metals industry and paper industry. Still, the energy-intensive industries are struggling. The natural gas use by the Dutch manufacturing sector has increased in March, but remains much lower than before energy prices started to rise in 2021. The decline in energy and commodity prices is still significant, however, because it might cool inflation as it moves through production chains.

There are other good signs as well. Suppliers’ delivery times again became shorter, making it easier for firms to obtain the right materials. And employment increased because firms are hiring more staff in order to support future growth.

Weak demand is worrying

New orders dropped at the fastest rate since November. Backlogs of work declined very fast, at a rate last observed at the start of the pandemic, and before that in June 2012. The weak demand might be caused by higher interest rates. Firms are still reducing inventories of materials and finished goods. Since supply chains have mostly recovered from their chaotic state during the pandemic, it is no longer necessary to hold large inventories in order to avoid delayed delivery to customers. Weak demand can also be a reason to reduce inventories.

However, interest rates also play an important role, because higher interest rates make financing inventories more costly. Apart from inventories, interest rates are also relevant when the purchase of industrial goods is financed, for example capital goods such as machinery. Higher interest rates also impact demand for industrial goods from the construction sector. ABN AMRO expects a drop in construction output of 1.5% in 2023. The construction sector sources a wide range of industrial goods, such as metal products, rubber and plastic products, chemical products, glass, concrete and electronics. The outlook for the Dutch manufacturing sector in the short term remains muted. The reduction of inventories is continuing, but should be temporary. More worrying is the drop in order backlogs. If demand does not improve in the coming months, output might decline further.