NL Update - Dutch industry still struggling
The Nevi Netherlands Manufacturing PMI decreased from 49.6 in January to 48.7 in February, signalling a further drop in business activity. Industrial output again increased only slightly, while backlogs of work and stocks of purchases have decreased again, after small gains in January. New orders continued to fall, albeit at a slow rate.
Although industrial output might have bottomed out near the end of 2022, it is clear that firms are still reducing excess inventories that were built during the pandemic. Interest rates have increased very fast, which makes it more expensive to finance inventories, and now that supply chain disruption is basically over, material shortages have disappeared, making holding large inventories unnecessary, especially since demand is slow. While firms are still reducing stock holdings, most excess inventories seem to have been unwound already during the fourth quarter. Statistics Netherlands (CBS) reported that Dutch firms reduced their inventories by 5.5 billion euros, or 0.7% of Dutch Gross Domestic Product in constant prices. The last time that inventories were reduced to such a large extent was in 2009, during the financial crisis.
On the one hand, this situation causes weak demand for industrial goods and materials. On the other hand, this temporary weakness gave supply chains some time to recover, which has helped automakers and machine builders to finally get their hands on the parts they so badly needed to increase production.
Another benefit of weak demand is that the prices of some materials have started to drop. Producers of intermediate goods have experienced a notable reduction in costs. This is probably mostly driven by lower energy prices, since many intermediate goods such as chemicals and metals are energy-intensive. Nevertheless, energy prices are still elevated, about three times as high as two years ago. Moreover, prices of other energy sources such as coal have also dropped, leaving the mostly gas-dependent heavy industry in Europe relatively expensive compared to competitors in for example China and India. Thus, energy prices will probably continue to weigh on heavy industry. Despite the drop in natural gas prices to levels last observed before the Russian invasion in Ukraine, gas demand from the Dutch manufacturing sector has not picked up yet, which probably means many energy-intensive firms are still severely limiting production.
Dutch firms seem very optimistic about growth in the coming 12 months. Apart from heavy industry, the Dutch manufacturing sector was spared a severe crisis and might grow somewhat soon. Still, it is hard to see where strong growth will be coming from in the short term.