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Economy in Brief

Denmark's manufacturing Is Slowing Despite a Monthly Gain
by Robert Brusca  November 2, 2022

Denmark's manufacturing purchasing managers index (from the Danish Purchasing and Logistics Forum) has risen to 52.1 in October from 49.6 in September. This ends a three-month streak of the index being below 50 indicating a contraction in the sector. And it's coming off a period of extremely high readings - readings as high as of 70 back in June 2022 and readings of over 60 from March through May before that.

In October, there was an increase in the headline PMI, an increase in new orders, and an increase in production which we tend to view as the most important readings for the index. However, they are not the totality of the index. Weaker on the month was the employment reading, delivery speeds slowed, purchased inventories weakened, purchase prices weakened, the quantity of purchases weakened, and inventories of finished goods also weakened. Out of 8 components only 2 strengthened.

Looking at momentum, the month's increase in October has tended to put a more positive spin on trend. The three-month change in the Danish manufacturing PMI index is positive; in fact, the three-month change is higher for all the components as well, except for the prices of purchased goods. This is less because of the gain in October and more because the three-month comparison is off a base in July that showed exceptional and not-representational weakness. Over six months conditions are slightly more mixed. The headline is still stronger, orders and production are stronger; in fact, most of the components are stronger, except for a weakening of employment and for purchase of inputs and for the prices of purchased inputs. The 12-month change shows lower readings everywhere: the headline is lower, and all the components are lower.

Over the last 12 months the headline has an average rating of 57.7 which is stronger than the October reading of 52.1. Most of the components have readings above 50 for their 12-month averages indicating expansion. The exceptions are inventories of purchased inputs and the inventories of finished goods. Both of those inventory figures are below a diffusion value of 50 indicating that on balanced there has been ongoing contraction for inventories. Both inventory measures are decreasing, firms are holding smaller volumes of finished goods and as a result they're also holding smaller volumes of purchased inputs. However, the quantity of purchases has been holding up with the 12-month reading average of 58.7 although that metric takes a beating this month as it falls to 26.2.

While the manufacturing sector shows that there has been expansion and expansion in most of the categories over 12 months on average, in October we see some significant weakening compared to the average. The quantity of purchases, in fact, has the weakest reading with the diffusion value of 26.2 in October; the next weakest reading is delivery speeds indicating that firms can fill orders extremely quickly, hinting at some spare capacity. Inputs of inventory are at 49.9 in October, stronger than the inventories of finished goods which are at a reading of 41.5. While we found that there were increases across most components on the month, a closer look at this finds the new orders reading only at 51.0, barely showing expansion after weak readings showed contraction in the earlier three months.

The Danish data are confusing since we see some important topical weakness in October and yet we see broad improvements over the last three months. The reasons it's broad improvements over the last three months is that four months ago in June there was an extremely strong diffusion reading for the headline at 70 and corresponding strong readings up and down the line for the components. Still, the base for the three-month comparison is distorted sapping these gains of their meaning

Moreover, when we look at the current readings compared to values of 12 months ago, we find declines up and down the line with the exceptions ironically only for the two inventory measures. Over 12 months the manufacturing PMI itself is lower by some 19 diffusion points, new orders are lower by some 25 diffusion points, delivery speeds are lower by 50 diffusion points, and the quantity of inputs purchased is lower by nearly 48 diffusion points.

Ranking the Danish PMIs in October
The ranking of the October data on values back to the year 2000, a better than 20-year frame of comparison, gives us a headline PMI with a 28.8 percentile standing which places that well below its historic median. The median for the ranking statistics always occurs at a ranking of 50. Values above 50 are above their median and values below 50 are below their median. For Danish manufacturing, our values are below their median except for inventories of inputs which have a 73-percentile standing. After that, the next strongest reading is for the prices of purchases, which have a 43.4 percentile standing still, below their median. The weakest reading in October over this 20 plus year period is for the quantity of purchases with a 1.1 percentile standing. These data clearly began to look like Danish manufacturers are starting to batten down the hatches and prepare for demand slowdown. The quantity of purchases is extremely weak, and their delivery speeds are extremely fast with a 5.8% standing; low readings on delivery speeds mean that delivery speeds are fast- slow readings and delivery speeds indicate more heated economic activity. In this case, no lags have crept into the process. New orders have only a 21.2 percentile standing, and employment has only a 25.5 percentile standing.

Europe is an issue for Denmark-something's rotten in Europe?
Of course, we know the score in Europe. Denmark is not a European Monetary Union member, but it's a small country that tags along and is a member in the European Union and is clearly strongly connected to the European continent and to the activity and monetary policy there. Inflation in Europe has been high, and the European Central Bank has been raising rates. Activity in Europe has been slowing and, of course, the war casts a pall across the outlook for all of Europe regardless of whether a country is a member of the European Monetary Union, of the Economic Union or whether it has some tagalong status or no status whatsoever.

The Danish connection
Denmark is clearly closely influenced but what goes on in Europe. Its monetary policy is independent but clearly 'linked' by economic forces. Inflation in Denmark is running at 11.2% year-over-year on the HICP measure and at a 10% pace on its domestic measure, with a domestic core inflation rate (that excludes energy and food) at 5.9%. The core rate has ticked down slightly in September compared to a 6% pace in August, but it's still at a stronger year-over-year rate than it was in July when the gain was 5.5%. Headline inflation is steadily accelerating. Both the HICP and the national index have seen their annual rate of change accelerate for eight months in a row. The core rate had accelerated for nine months in a row through August and has recently decelerated with the year-over-year pays ticking down to 5.9% from 6.0%. Denmark faces many of the same challenges as the European Central Bank; it has raised its key rate in each of the last two months bringing it up to a level of 1.25% trailing the 2% rate of the European Central Bank.

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