Germany’s Economic Growth Slows in June Amid Manufacturing Decline

German Business Activity Slows in June

Germany’s economic activity experienced a slowdown in June, as indicated by the latest HCOB ‘flash’ PMI® survey conducted by S&P Global. This marked the third consecutive monthly increase in business activity across the German private sector, although the rate of growth slowed significantly. The decline was primarily attributed to a sharp drop in manufacturing production, which had a notable impact on the overall economic performance.

Decline in Business Optimism and Employment

Business optimism towards the year ahead softened, and employment fell for the first time in three months. The labour market experienced a setback despite some growth in the services sector. Employment within the service sector continued to rise, albeit at a slower pace, while manufacturing jobs declined for the twelfth consecutive month.

Mixed Performance in Services and Manufacturing Sectors

The Composite PMI Output Index remained above the 50.0 no-change threshold for the third month but dropped to 50.6 from May’s 52.4, signaling a noticeable slowdown in growth across the private sector. The services sector showed a solid increase with an index of 53.5, although the momentum was waning. Conversely, manufacturing faced a significant setback, with the output index falling to 44.9, marking the fastest rate of decline in three months.

Impact on New Business and Export Sales

New business orders fell overall due to a sharp decline in manufacturing orders, which overshadowed modest gains in the services sector. While the services sector saw a second consecutive monthly rise in new business from abroad, manufacturing export sales fell at the quickest rate since March.

Inflation Trends in Services and Manufacturing

Inflation in the services sector remained high, with a slight uptick in output prices from a 40-month low in May. The rate of increase in service sector input costs slowed to its lowest since March 2021. In contrast, manufacturing saw further price cuts due to weak demand, with declines in both input and output prices easing slightly.

Economist’s Perspective on the Economic Outlook

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, expressed concerns about the sharp downturn in manufacturing, highlighting the significant drop in new orders and the rapid clearance of inventories. Despite the manufacturing slump, the service sector remained robust, with businesses raising sales prices and experiencing strong new orders and export business.

Conclusion: Divergent Sector Performances

In conclusion, Germany’s economic growth in June was hindered by a marked decline in manufacturing, while the services sector continued to perform well. This divergence between the two sectors presents a mixed outlook, with ongoing inflation concerns in services potentially influencing future ECB policies.