European Factories Brace for Economic Rebound to Falter

(Bloomberg) -- European manufacturers aren’t getting carried away by the recent rebound in activity and are trying to save money wherever possible to be prepared for another shock.

Companies cut jobs again in August, and reduced inventories of raw materials and semi-manufactured stocks instead of ordering supplies, according to IHS Markit. It’s a similar story in Asia, where factory employment declined in Japan, South Korea and Taiwan.

On the surface, numbers look better. IHS Markit’s Purchasing Managers’ Index for the euro area indicated growth for a second month, at 51.7 versus 51.8 in July. Output expanded at the fastest pace in more than two years, and confidence improved. Headline indexes also rose in Asia, with a China gauge hitting the highest since 2011.

A separate report from Germany’s Kiel Institute for the World Economy found global trade is on course to pick up more quickly from the coronavirus than after the 2008 financial crisis.

However, the European Central Bank and others have warned that any recovery will be long. Low inflation remains a concern, with figures Tuesday showing the first year-on-year decline in euro-zone consumer prices in four years. The ECB will have fresh forecasts at its policy meeting next week to provide a better picture about how far the economy has come.

“Caution is warranted in assessing the likely production trend, however, as so far it would have been surprising to have seen anything other than a rebound in output and sentiment,” said IHS Markit’s Chris Williamson. “Worryingly, order book growth cooled slightly in August, and there are indications that firms are bracing for a near-term weakening of demand.”

In the U.S., the pickup in manufacturing proved slightly faster than Europe’s in August, according IHS Markit. At the same time, employment growth there as well as an acceleration in new orders highlights uneven global growth.

German Outlook

Germany’s government on Tuesday said the economic damage from the pandemic will be less than previously feared. It’s now predicting a 5.8% contraction, compared with an April prediction for 6.3%, though it also downgraded its prediction for a 2021 rebound to 4.4%.

In a sign that the situation is still far from normal, an Ifo report Monday said some 37% of companies in Germany are still making use of state wage subsidies.

Uncertainty remains high that resurgent infections in Germany and many parts of the euro region will prompt new restrictions, keeping spending and investment restrained. High-frequency indicators tracked by Bloomberg Economics suggest the recovery pace is already slowing.

“Manufacturing is currently being buoyed by a wave of pent up demand, but capacity is being scaled back,” said Williamson. “The next few months’ data will be all-important in assessing the sustainability of the upturn.”

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