German Manufacturing at 4-Month Low, Services Sector Demonstrates Limited Strength

Highlights

• German Manufacturing PMI falls to 42.3, indicating a significant decline.
• The services sector shows slight improvement, reaching its highest point in two months.
• Economic challenges continue in Germany, leading to a cautious outlook for 2024.  

Persistent Economic Challenges in Germany

Germany's economic woes persisted in February, marking the eighth consecutive month of contraction, according to the latest HCOB 'flash' PMI® survey by S&P Global. The HCOB Flash Germany Composite PMI Output Index signaled an accelerated downturn, reflecting ongoing difficulties.

Manufacturing Sector Struggles

The manufacturing sector faced significant challenges, with the HCOB Flash Germany Manufacturing PMI hitting a four-month low of 42.3, well below the expected 46.1. This decline was characterized by a sharp decrease in manufacturing output, indicating deepening troubles for the sector.

Service Sector Displays Some Resilience

In contrast, the service sector showed slight improvement, with the HCOB Flash Germany Services PMI Business Activity Index rising to a two-month high of 48.2, slightly surpassing forecasts. However, it still indicated a modest contraction. Employment levels remained stable, reflecting cautious optimism among service firms.

Rising Costs and Supply Chain Issues

The survey highlighted a significant increase in business costs, the most substantial in ten months, driven primarily by wage pressures in the service sector. Manufacturing prices continued to decline due to reduced demand. Supply chain disruptions, though present, had limited impact, with some improvements in delivery times noted.

Challenges in New Business and Exports

Both manufacturing and service sectors experienced a rapid decline in new business, particularly sharp in manufacturing. Export business also saw widespread reduction, exacerbating economic challenges.

Labor Market Resilience and Business Expectations

Despite dwindling new orders, the labor market showed resilience, with only a slight decrease in employment. Significant hiring was observed in the service sector, contrasting with job losses in manufacturing. Business expectations saw improvement, driven by optimism in services, although manufacturing sentiment deteriorated.

Inflation and Pricing Trends

Input cost inflation continued to rise steadily, particularly in the service sector facing increased labor and energy costs. Meanwhile, manufacturing purchase prices saw a slower rate of decline, suggesting a slight easing in price reductions.

Expert Commentary on Economic Outlook

Dr. Tariq Kamal Chaudhry, Economist at Hamburg Commercial Bank, highlighted the ongoing economic pressures in Germany, noting severe manufacturing downturn and challenges in new orders. While some positives were seen in the service sector, the overall economic outlook for 2024 remains cautious, with structural challenges and demographic shifts posing further hurdles.