Germany: Downturn in the manufacturing sector intensifies at the start of Q3
After stabilizing at 52.6 in June due to a strong services sector offsetting the downturn in manufacturing, the IHS Markit composite Purchasing Managers’ Index (PMI) dropped to 51.4 in July. The moderation in the headline figure marked a four-month low and reflected a deepening downturn in the manufacturing sector while growth in the services sector slowed.
The export-oriented manufacturing sector posted its worst performance in seven years amid a steep drop in output as well as falling new orders, employment and purchasing activity. Manufacturing new orders declined at the quickest pace in over a decade amid decreasing export sales—export sales to China were particularly hit as China’s economy is slowing down—and a struggling automotive sector. Meanwhile, backlogs of work decreased at the strongest rate since June 2009. As the downturn in the manufacturing sector intensified at the start of the third quarter, goods producers shed workers at the quickest pace in seven years. Phil Smith, principal economist at IHS Markit, noted that “the health of German manufacturing went from bad to worse in July […], raising the risk of the euro area’s largest member state entering a mild technical recession.”
On the other hand, the services sector remained robust in July, despite activity losing some steam. Resilient domestic demand buttressed the services sector as service providers also recorded softer inflows of new export orders. Outstanding work consequently increased at a very weak pace. However, headcounts at service firms continued to rise at a robust pace. “Still solid growth in the service sector means that the German economy is just about keeping its head above water for now”, Smith added.
Despite the still-robust momentum in the services sector, service providers’ confidence dropped to its lowest level since December 2014; sentiment among goods producers regarding future output, meanwhile, fell to a near seven-year low in part owing to the lingering weakness in the automotive industry.
In terms of prices, input price pressures eased to an almost three-year low in the manufacturing sector, but remained elevated in the services sector. Output price inflation was stable in the services sector, but factory gate prices dropped for the first time in nearly three years.