Germany: Manufacturing output contracts for the first time in over six years; service sector activity accelerates
Providing ground for optimism, February’s composite Purchasing Managers’ Index (PMI) edged up for the second consecutive month, indicating stronger growth in business activity in Germany’s private sector. The index rose to 52.7 in February, a four-month high and up from January’s 52.1. As a result, the index moved further north of the neutral 50-point mark that separates expansion from contraction. However, the fact that the improvement was solely due to the services sector is a reason for caution.
Business activity in the services sector picked up in February at the strongest pace in five months amid the first rise in backlogs of work in three months. Consequently, service providers continued to increase their payroll numbers. Contrasting the improvement in the service sector, the headline manufacturing index fell to an over six-year low in February as manufacturing output contracted for the first time since April 2013. In addition, the manufacturing sector dropped into contractionary territory due to a fall in new orders, a marked drop in outstanding work and negative contributions from purchasing activity and supplier delivery times. Moreover, new orders fell at the strongest pace in over six years due a still-weak automotive sector and declining demand from Asia, particularly China, as global trade tension continued to linger. To compound matters, tensions could pick up again after the truce between the U.S. and China ends in early March, which would likely prove problematic for Germany’s export-orientated manufacturing sector.
Inflationary pressures eased somewhat in February with only soft increases in input and output prices recorded across both the services and manufacturing sectors. Input prices rose at the lowest pace in one-and-a-half years due to weaker demand, although higher staff remuneration lifted operating expenses somewhat.
Meanwhile, business sentiment increased to its highest level in five months. This was single-handedly due to the services sector; manufacturers remained pessimistic with their business expectations for the year ahead dropping to its lowest level in over six years.
Phil Smith, principal economist at IHS Markit, noted:
“While strong fundamentals in the domestic market are driving growth in services business activity, falling exports continue to weigh on the performance of the manufacturing sector. […] In terms of the factors behind the slowdown in manufacturing order books, many of the usual suspects […] were highlighted, although there were also reports of growing competitive pressures within Europe.”