War and inflation weigh down activity in Spanish factories

A worker in a vehicle assembly factory. / afp

The manufacturing PMI index stands at 53.3 points in April in its worst reading in the last 14 months

Clara Dawn

The impact of the war in Ukraine on inflation and energy costs is far from over. After a first quarter in which practically all the economies of the euro zone have experienced a notable slowdown in the recovery process, some of the key macroeconomic indicators continue to show serious weaknesses that show that there is still a long way to go to get out of the current crisis.

This is the case of the Purchasing Managers Index (PMI) that measures manufacturing activity in Spain. That is, the rate of production in domestic factories. The indicator, one of the most followed by investors when assessing the situation in the face of the crisis, fell significantly to 53.3 points in April.

It is true that whenever the figure is above 50, it indicates expansion. But in March it stood at 54.2 (after falling from 56.9 in February). And April's is the worst reading in the last 14 months and, what is worse, it has been below the 54 expected by the consensus of analysts. So it is clear that, although it continues to grow, the activity of the industry in Spain loses momentum at times.

“The recent lockdowns in China, in an attempt by the authorities to combat the new wave of the pandemic that the country is suffering by applying their Covid-zero strategy, has once again strained the supply chains of many products, which has important connotations. inflationary”, explains Juan J-Fernández-Figares, an analyst at Link Securities.

But there are more factors that have contributed to a decline in the indicator prepared by S&P Global. "Spanish manufacturers faced a combination of problems such as the supply chain, rapid inflation and uncertainties related to the war in Ukraine, explains Paul Smith, economist at the firm, in the report that accompanies the publication of the fact.

"These factors subsequently slowed down production and affected order books," which fell for the second consecutive month, according to the data's historical series. And this could be due, in turn, to the inflationary gap that exists between Spain and the rest of the euro zone, especially with first-tier trading partners such as France or Germany, since our products are now less competitive via price as they register a higher inflation (8.4% in April compared to the average of 7.5% in the euro zone). The data also indicates that Spanish manufacturers ended up with a record increase in the 'stock' of finished products, generated in part by the recent stoppage of transport in the country.

Despite the fact that Spain is experiencing a notable slowdown in manufacturing activity, the situation is similar throughout the euro zone, where the high level of uncertainty regarding the outcome of the war continues to hold back domestic demand and companies are finding it increasingly difficult to bear the costs from the rise in energy and raw material prices.

"Two of the main economies of the Eurozone, the Italian and the French, did not grow in the first quarter, with the first of them even experiencing a slight contraction in quarter-on-quarter terms (-0.16%)", the experts recall. And for the region as a whole, growth in the period was also practically non-existent, barely 0.2% in quarter-on-quarter terms.

In this environment, the PMI index for the manufacturing sector in the euro zone also fell from 56.5 points in March to 55.5 in April. They are minimums of 15 months and the third consecutive fall. Beyond Spain, the data of the economic engine of the region, Germany, where both new orders and production entered contraction territory for the first time since June 2020, in the midst of the coronavirus crisis, are of particular concern.

“Companies not only reported that persistent problems with component shortages were exacerbated by the war in Ukraine and new lockdowns in China, but also commented that rising prices and growing uncertainty about the economic outlook are also affecting demand”, indicates in its S&P Global report.

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