Germany: Private sector starts new year on stronger footing, while the outlook improves
Germany’s private-sector economy started the new year on stronger footing as the composite Purchasing Managers’ Index (PMI), produced by IHS Markit, rose to 51.1 in January from 50.2 in December (previously reported: 49.4). The headline index consequently remained above the neutral 50-threshold and indicates an overall increase compared to the previous month. However, the data also highlighted the ongoing dichotomy in the Euro area’s largest economy.
The manufacturing downturn remained intense despite softening in January to the weakest decline since August 2019. New orders continued to fall, albeit at the slowest pace in over a year as the external sector improved somewhat: Goods exports fell at the slowest clip in 17 months. However, headcounts were reduced yet again in the goods-producing sector as the underlying dynamics remain fragile. More positively, activity in the service sector expanded at a five-month high. New business increased at a stronger clip in the month, with new orders from abroad nearly stabilizing. Job creation was strong in the service sector as a result.
Private-sector business expectations regarding output in the year ahead, meanwhile, were buoyed by a jump in manufacturers’ expectations to a near one-and-a-half-year high, while expectations among service providers increased moderately.
Regarding prices, input cost inflation rose to a six-month high on the back of higher wages, more expensive fuel and pricier energy. However, firms bore the brunt of it as output price inflation increased at the weakest rate in over three-and-a-half years. There was, however, a discrepancy at the sector level: weak output price inflation was mainly due to a reduction in manufacturing output prices, whereas service providers charged higher prices due to the strongest rise in costs since April 2019.
Phil Smith, Principal Economist at IHS Markit, commented that there are “a number of positive takeaways from January’s flash PMI survey”. Chief among them is the data suggests that “the storm clouds over the German economy may be starting to clear.”