Management Today's latest quarterly manufacturing performance index makes grim reading for Europe's four largest economies. The modest signs of recovery evident last October have been all but extinguished, and the European economy, as a whole, seems to be slipping even deeper into recession. The index does not measure the buoyancy of the economies in the normal way, although GDP in manufacturing is an index component. It shows, rather, how the manufacturing sectors of the economies are being affected by the economic climate. In this case it shows the damage weak demand is inflicting on company productivity, inventories, order books and capacity usage.
According to our index, based on the EC Commission's adjusted figures, the French and Italian economies continue to maintain close station with each other. Italy shows a very modest improvement in recent months but it is the most volatile of the four economies and it is hard to believe it will not resume its downward trend.
Much the most dramatic development in the index over the past three months has been the sharp decline in the performance of Germany's manufacturing sector. The post-unification party lasted two years but the artificial buoyancy is now clearly spent and the hang-over looks like being painful. And hopes that the Bundesbank might ease the pain with deep reductions in interest rates seems to have been scotched by the recent sharp rise in German money supply.
One of the problems for German companies has been the alarming speed with which the German economy has gone ex-growth. Major companies, such as Daimler Benz, Volkswagen, Hoechst, BASF, Bayer, Mannesmann and Metallgesellschaft all reported sharp falls in third quarter profits and Volkswagen, for one, is expecting the final quarter to be even worse. Dividend cuts are now firmly on the agenda. To make matters worse, the strength of the Deutschmark, which is at once the consequence of the Bundesbank's refusal to lower interest rates and the cause of the effective collapse of the ERM, has severely undermined the international competitiveness of German companies, at a time of depressed demand in most of its foreign markets. It does not seem, right now, at any rate, as if God is on the side of Germany's big battalions.
It has to be said, however, that in the recent past, the German economy has proved itself remarkably resilient in the face of a strengthening Deutschmark. Its small and medium-sized companies, where the real strength of its economy lies, have tended to over-compensate for adverse currency movements and have emerged more competitive, if anything, after each DM surge.
Other things being equal, however, recent currency re-alignments are likely to improve prospects for Italian and UK exporters, at the expense of German manufacturers, and, if German money supply behaves itself, allowing German interest rates to fall, general economic conditions may look a little brighter by the summer.
Graph not included on Textline.