August Reveals German PMI Slump: Inflation Takes a Toll

Highlights

• German PMI slumps to three-year low.
• Services and manufacturing face significant downturns.
• Rising inflation exacerbates business challenges.

German Business Activity Dips Amid Rising Inflationary Pressures

August witnessed a significant slump in German business activity, the largest in over three years. Both manufacturing and services faced challenges, as revealed by the recent HCOB ‘flash’ PMI® survey. With high inflation, rising interest rates, and customer uncertainty looming large, German industries grapple with unfavorable conditions.

Manufacturing and Services Decline

The HCOB Flash Germany Composite PMI Output Index highlighted a troubling trend, as it sank to 44.7 from July’s 48.5, emphasizing the deepening contraction. Manufacturing, a cornerstone of the German economy, experienced its fourth consecutive monthly drop, with the decline rate reaching a three-year high at 39.7. Services didn’t fare much better. After eight months of stability, the sector witnessed its business activity drop significantly to an index of 47.3.

Challenges in Orders and Employment

August saw a recurring theme: declining new business inflows across the private sector. The plummeting manufacturing orders stood out, with client destocking and investment hesitancy causing the most significant demand decline since May 2020. The service sector didn’t escape unscathed, with new business falling rapidly due to hesitant clients and a squeeze on budgets. As backlogs of work reduced, manufacturing firms became reluctant to hire, resulting in a decrease in workforce numbers. Services sector job growth almost halted, maintaining the employment status quo for the month.

Price Inflation and Its Impacts

August observed a spike in input cost and output charge inflation, primarily driven by rising fuel prices. While manufacturing purchase prices experienced a drop, service firms faced substantial operational cost hikes, influenced by increased fuel costs and wage pressures. The disparity in output price inflation rates between sectors was evident as service charges rose sharply, contrasting with a continuous drop in manufacturing.

Short-Term Outlook

The downturn in German business activity, combined with escalating inflationary pressures, paints a bearish picture. As Dr. Cyrus de la Rubia from Hamburg Commercial Bank points out, there’s an onset of stagflation in the services economy. The silver lining, however, is that the declining trend in manufacturing might be nearing its end, hinting at a potential economic turnaround. Still, with inflation difficult to control in Europe’s largest economy, challenges await the ECB.