NL Update - Manufacturing industry cuts production due to weak demand
While the Dutch manufacturing industry recovered in the second quarter, the third quarter seems to be significantly more difficult. The Nevi Dutch Manufacturing PMI fell from 49.2 to 47.7 in August, the lowest reading since December last year.
After the number of new export orders had already fallen sharply in July, domestic demand exerted a greater drag on total new orders in August. The malaise in the industry seems to be broadening. Industrial entrepreneurs reduced production, purchased less materials and, in some cases, decided not to post vacancies to replace departing staff.
Earlier, the preliminary purchasing managers' indices for the eurozone showed that the manufacturing industry, especially Germany, is struggling. Germany is the most important export market for Dutch industry. Several industrial sectors are struggling in Germany, such as the chemical, the steel, the automotive and the machinery industries. Dutch manufacturers supply chemical products and machinery to Germany, among other things.
There are several reasons for the slump in the industry. For example, energy-intensive sectors such as the chemical and steel industries are still struggling with relatively high energy costs. The gas price in Europe is still much higher than before the energy crisis, which arose because Russia has been supplying less gas to Europe since 2021. Europe now has to buy LNG on the global market, which leads to higher costs and therefore makes the energy-intensive industry less competitive globally.
Another cause is probably high interest rates. This causes slower economic growth and leads to higher borrowing costs for companies, which depresses investment and thus leads to lower demand for investment goods such as machinery. The demand for building materials is also lower, because higher interest rates make financing new construction projects more expensive.
Fortunately, long-term interest rates on the capital market have already fallen somewhat, by about 0.2 percentage points compared to July. We are waiting for the next interest rate meeting of the European Central Bank (ECB), which is scheduled for Thursday 12 September. Due to the summer holidays, there was no meeting in August. Hopefully, the ECB will cut policy rates this month, which could lead to lower interest rates in the capital market and boost demand for industrial goods.