German PMI Slumps in August as Inflation Takes Toll.

During the month of August, there was a significant decrease in German business activity, reaching its lowest level in three years. The HCOB PMI Index dropped to 44.7, indicating a worsening economic slump.

Highlights

• The German Purchasing Managers' Index (PMI) has reached its lowest point in three years, indicating a significant decline in economic activity.
• Both the services and manufacturing sectors in Germany are experiencing substantial downturns, with decreased levels of production and business activity.
• The rising inflation in Germany is compounding the challenges faced by businesses, as it leads to higher prices for goods and services.

Declining Inflation Sparks Decrease in German Business Activity In August, there was a significant decline in business activity in Germany, the largest decrease in over three years. Both the manufacturing and services sectors faced difficulties, according to a recent survey by HCOB 'flash' PMI®. With high inflation, rising interest rates, and customer uncertainty, German industries are struggling with unfavorable conditions.

Decline in Manufacturing and Services The HCOB Flash Germany Composite PMI Output Index showed a worrying trend as it dropped from 48.5 in July to 44.7 in August, indicating a deepening contraction. Manufacturing, which is a crucial part of the German economy, experienced its fourth consecutive monthly decline, with the rate of decline reaching a three-year high of 39.7. Services did not fare much better, with business activity dropping significantly to an index of 47.3 after eight months of stability.

Challenges in Orders and Employment August saw a common theme of decreased new business inflows across the private sector. Manufacturing orders plummeted, with a significant decline in demand since May 2020 due to client destocking and investment hesitation. The service sector also experienced a rapid fall in new business due to cautious clients and tightened budgets. As backlogs of work diminished, manufacturing firms were reluctant to hire, resulting in a decrease in the workforce. Job growth in the services sector also stagnated, maintaining employment levels.

Price Inflation and Its Effects There was an increase in input cost and output charge inflation in August, primarily driven by rising fuel prices. While manufacturing purchase prices decreased, service firms faced significant increases in operational costs due to higher fuel expenses and wage pressures. The difference in output price inflation rates between sectors was evident, with service charges rising sharply while manufacturing prices continued to drop.

Short-Term Outlook The decline in German business activity, coupled with escalating inflationary pressures, presents a negative outlook. Dr. Cyrus de la Rubia from Hamburg Commercial Bank suggests that stagflation is becoming apparent in the services economy. However, there is a glimmer of hope as the declining trend in manufacturing may be nearing its end, potentially indicating an economic turnaround. Nonetheless, with inflation challenging to control in Europe's largest economy, the European Central Bank (ECB) faces further challenges.