German Manufacturing PMI Rises, While Services Sector Deteriorates

Key Points

• Services PMI hits five-month low, signaling downturn.
• Manufacturing PMI improves, yet remains in contraction.
• Service sector optimistic, manufacturing faces external challenges.

German Private Sector Analysis: Early 2024

As 2024 unfolds, Germany’s private sector continues grappling with economic contraction. The latest HCOB Flash Germany PMI survey by S&P Global reveals persistent challenges across both the services and manufacturing sectors. This analysis delves into key aspects such as activity levels, demand conditions, employment trends, and inflationary pressures.

Service Sector Contraction

The services sector, a crucial component of the economy, experienced a notable downturn at the start of the year. The HCOB Flash Germany Services PMI Business Activity Index fell to a five-month low of 47.6. This decline reflects customer hesitancy amidst high financing costs and geopolitical uncertainty, leading to a reduction in new business inflows.

Manufacturing Sector’s Mixed Signals

Manufacturing, a vital pillar of the German economy, shows signs of a nuanced recovery. The HCOB Flash Germany Manufacturing PMI Output Index rose to 46.0, an eight-month high, indicating a slowdown in the rate of contraction. However, the overall Manufacturing PMI reached 45.4, marking an 11-month high, suggesting a gradual improvement in the sector’s health. Despite this, the sector remains in a recessionary phase, impacted by global supply chain disruptions, notably the events in the Red Sea.

Employment and Inflation Trends

Employment trends varied across sectors. The service sector maintained relatively stable employment levels, while manufacturing witnessed more significant job losses. On the inflation front, service sector firms faced heightened cost pressures, particularly from wage demands, leading to an increase in service prices. Conversely, manufacturing prices continued to decline, albeit at a slower pace.

Comment from Chief Economist

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, notes the sluggish start for Germany’s economy in 2024, with significant impacts from supply chain disruptions and persistent inflation in the service sector. The ongoing recession is expected to continue into the current quarter, influenced by global events and internal economic dynamics.

Short-Term Market Outlook

In the short term, the German private sector’s outlook is cautiously mixed. The services sector shows a degree of optimism, likely buoyed by its ability to transfer increased costs to consumers. However, the manufacturing sector, despite showing signs of recovery, continues to be hampered by external challenges such as supply chain disruptions and inflationary pressures.

This results in a tempered optimism within the sector. Overall, the economic landscape in early 2024 presents a scenario of gradual, sector-specific recovery amidst a backdrop of persistent challenges, with the resilience in services sector employment and cautious optimism contrasted against the cautious recovery and ongoing difficulties faced by the manufacturing sector.