Germany: Composite PMI improves slightly in August but still languishes around six-year lows
Leading indicators suggest momentum in the Eurozone’s largest economy remained weak in August, amid divergent dynamics in the services and manufacturing sectors. The flash composite Purchasing Managers’ Index (PMI), which is produced his Markit, edged up to 51.4 in August from 50.9 in July, thanks to a slight upturn in the manufacturing sector. As a result, the PMI moved slightly further above the 50-point threshold that separates expansion from contraction in Germany’s private sector. Nevertheless, August’s result marked one of the weakest performances over the past six years.
The details of the release suggest that Germany remains a two-speed economy. Despite edging up to 43.6 in August (July: 43.2), the manufacturing PMI remained firmly entrenched in negative territory, pointing to sustained contractionary activity in the sector. Manufacturing new orders continued to decline in August, chiefly due to faltering external demand amid China’s economic slowdown, heightened geopolitical tensions and deteriorating dynamics in the car industry. In turn, backlogs of work shrank again in August, business sentiment slumped to the lowest on record and employment levels declined at the fastest pace in seven years among German manufacturers.
Meanwhile, the services sector PMI index came in at 54.4, slightly below July’s 54.5 but demonstrative of robust growth in the sector nonetheless. That said, August’s result marked a seven-month low, chiefly reflecting slowing growth of new orders and declining backlogs of work. On a more positive note, employment growth held up in August.
In terms of prices, input costs fell in the manufacturing sector, while inflationary pressures remained heightened in the services sector. As a result, output prices continue rising markedly in the services sector in August, contrasting just a mild increase in factory gate prices.
Commenting on the release, Phil Smith, principal economist at IHS Markit, noted that the German sectors continue to diverge with “ongoing growth of services just about compensating for the sustained weakness in manufacturing”. Smith added that headwinds seem to be rising in the services sector, as reflected by “inflows of new work barely rising in August and business confidence at its lowest for almost five years”. Looking forward, “the survey’s output data haven’t changed enough to dispel the threat of another slight contraction in GDP in the third quarter”, according to Smith.