ifo shortage indicator shows material scarcity
Shortage of materials can hamper industrial production in Germany. Industrial enterprises which are included in the survey of the ifo Institute give a monthly statement if they have been affected by impediments to production caused by scarce raw materials and intermediate products. The ifo Institute publishes a shortage indicator based on that regular survey, which is presented in Figure 1. The indicator shows the percentage of enterprises that answered yes to the question about impediments to production because of raw material or intermediate product shortages. The survey on the shortage of raw materials and intermediate products is usually conducted at quarterly intervals but right now it is taken every month. The ifo Institute uses the following name for its indicator: ifo index for the shortage of intermediate products in manufacturing.
Figure (1)
Figure (2) shows the current results by branch of industry.
Figure (2)
Not all orders can be completed
Industrial businesses with a healthy order book may not be able to complete all their orders when materials are in short supply. Figure (3) shows how orders and industrial production have developed in Germany. The upward trend of the new orders index has been markedly stronger than that of the production index since mid-2020. When the new orders index is regarded as an indicator of how demand is developing and the production index as measuring the development of supply, then the total demand for industrial goods has increased more strongly since mid-2020 than the supply of such products.
Figure (3)
Figure (3) shows also the index of the stock of orders. The stock of orders comprises all new orders received by the end of the reference month which have neither led to any turnover nor been cancelled by that time. As new orders have risen more strongly than production, the stock of orders in manufacturing has increased considerably.
Covid-19 crisis caused supply chain problems
All over the world, the measures taken to contain the Covid-19 pandemic have had an impact on the supply of and demand for industrial goods.1 There was much uncertainty about the future economic development during the initial phase of the pandemic which caused businesses to adjust their production plans and led to reductions of production and transport capacities in many industries.2 The economic recovery which started simultaneously in many regions of the world in the months that followed generated a high demand for industrial products. Due to the restrictions on public life, private consumption patterns shifted from services (travel, food and beverage services, for example) to consumer durables such as electronic devices and furniture at the same time.3 International supply chains had however been affected by the pandemic restrictions. It took many months to build or rebuild productive capacities for some products, and existing production capacities were repeatedly affected by production stops in individual regions due to the pandemic. Industry was not able to completely meet the sudden and in part unexpected demand after the first phase of the pandemic. Production costs surged as businesses competed for raw materials, intermediate products and transport services, and energy prices rose sharply as well. The supply chain problems hampered the development of industrial activity in Germany during all of 2021 despite continued high demand.4 Russia’s attack on Ukraine has again worsened the shortage of materials after a short recovery phase at the beginning of 2022.5
Material shortage is not a new phenomenon
Material scarcity is a recurring phenomenon in industry. These shortages were however far from what we saw in 2021 and at the beginning of 2022, when the effects of the Covid-19 crisis were felt. Looking back at the economic development since the beginning of the 1990s, Figure (4) shows the development of the production and new orders indices of the Federal Statistical Office in addition to the ifo shortage indicator presented above. The cyclical trend shown illustrates the past economic development.6
Figure (4)
It can be seen that there usually is increasing material shortage in the upswing phase of the business cycle. As industrial production comprises several stages, a growing demand for final products (such as passenger cars) leads to production expansion which, in turn, increases the demand for intermediate products (electrical components or steel products, for example). These dynamic processes along the supply chains can cause material shortages, making it difficult for industry to translate a healthy order book into production.
The rising prices of intermediate products then usually provide incentives for their producers to supply more of these products. On the demand side, producers of final products are faced with higher production costs due to rising material prices which they cannot always pass on to their customers. Once a break-even point is reached, the demand for intermediate products may go down. Supply and demand balance each other in the medium term. In the process, a gap may however arise between new orders and production with new orders increasing more than production.
Material shortages are passed on at international level
The German industry has close international links. While Germany exports many industrial products, industrial production in Germany relies on imports. In value terms, 38% of the goods that German industrial businesses use as intermediate goods in their production processes come from abroad.7On account of that interdependence, material shortages are passed on also internationally. Figure (5) shows the cyclical development of the import and export volumes of intermediate goods and the cyclical development of intermediate goods production in Germany.
Figure (5)
There is a very similar development of the domestic production and the imports and exports of intermediate goods as a consequence of the international interdependence in the field of goods production. Germany’s most important trading partners for intermediate goods are listed in Table (1).
| Country | Imports | Country | Exports |
|---|---|---|---|
| People's Republic of China | 10.1 | France | 8.0 |
| Netherlands | 6.9 | United States | 6.8 |
| Belgium | 6.4 | Netherlands | 6.7 |
| France | 5.9 | People's Republic of China | 6.4 |
| Italy | 5.9 | Poland | 6.0 |
| United States | 5.3 | Italy | 5.7 |
| Poland | 5.2 | United Kingdom | 5.2 |
Many electronic components such as semiconductor elements and electronic integrated circuits are imported from the People's Republic of China. Intermediate goods imported from the Netherlands and Belgium are plastics, metals or chemical products, for example.
Material shortage is reflected by a rise in producer and import prices
Another indicator of intermediate products being in short supply is the price development at the upstream stages of the production process. In addition to the ifo shortage indicator for manufacturing, Figure (6) shows the cyclical development of the producer and import price indices of intermediate goods. It can be seen here that they are also closely related with the shortage of raw and intermediate materials in the production process. Phases of increased materials shortage are usually accompanied by a cyclical upswing in both producer and import prices of intermediate goods. Energy sources such as crude oil and natural gas are not included under intermediate goods here but their price development indirectly influences the cyclical development of intermediate goods prices presented in Figure (6).
Figure (6)
Conclusion
The long-term development of the ifo shortage indicator shows that material scarcity is a recurring phenomenon in industry. In the past, the shortages had however been far from what we saw in 2021 and at the beginning of 2022, when the effects of the Covid-19 crisis were felt. If materials are in short supply, industry cannot complete all orders though order books are well filled. As new orders have risen more strongly than production, the stock of orders has increased considerably. Russia’s attack on Ukraine at the end of February 2022 has again worsened the shortage of materials after a short recovery phase at the beginning of 2022. Due to the shortage, industry is not able to exploit the demand-induced potential created by the economic momentum.
In the past, upswing phases were usually accompanied by increasing material shortage, as is shown by a comparison with the cyclical development of central industrial short-term economic indices of the Federal Statistical Office. It can then be difficult for industry to translate a healthy order book into production: incoming orders grow at a faster pace than production. Due to the global interdependence in goods production, material shortages are passed on also internationally. In addition, phases of increased materials shortage are usually accompanied by a cyclical upswing in both producer and import prices of intermediate goods.
Footnotes:
1: Compare, for example: Council of Economic Experts: “Shaping the Transformation: Education, Digitalisation and Sustainability”. Annual Report 2021/22, Wiesbaden 2021, page 20 f.
2: In Germany, investments had dropped considerably in 2020 compared with the preceding year, especially regarding the manufacture of basic metals, the manufacture of fabricated metal products (except machinery and equipment) and the manufacture of computer, electronic and optical products. Compare Federal Statistical Office, press release no. 523 of 16 November 2021: "Industry investments in 2020: 14% lower than in the previous year".
3: Compare Federal Statistical Office, press release no. 122 of 15 March 2021: "Household final consumption expenditure markedly down in 2020" and press release no. 531 of 22 November 2021: "Household final consumption expenditure down by nearly 3% in 2020".
4: See also Stefan Linz, Malte David Neumann, Salima Abdalla, Gerda Gladis-Dörr on the impact of the constraints due to the Covid-19 pandemic on the supply chains of industrial businesses in Germany: "Impact of the Covid-19 pandemic: delivery bottlenecks slow down industry and push up prices". In: WISTA Wirtschaft und Statistik. Edition 1/2022, pages 71 to 83.
5: ifo Institute (2022), press release of 1 April 2022: “Shortage of materials in Germany worsens following the attack on Ukraine”.
6: The cyclical development is calculated as the deviation of the medium to short-term trend from the long-term trend of the respective statistics. The cyclical development is well suited for looking back on the economic development. It is however less suited to assess the current development and therefore shown as a dashed line from the beginning of 2020. Figure (3) should be used to consider the current development.
7: The input-output tables (2018) were used in the computation.