German services PMI defends as inflationary pressures

Business activity fell for the sixth consecutive month in the German private sector in December, although the contraction rate lost some momentum thanks to a slight recovery in services activity, according to the latest HCOB® Flash Survey. Manufacturing remained in deep stagnation and saw more significant job losses. Meanwhile, business confidence towards next year’s growth prospects improved slightly but remains dimmed by historical standards.

Alongside weakness in business activity, there has been an increase in price pressures, with inflation rates in input costs and production prices accelerating to their highest levels in eight and ten months respectively.

The HCOB Flash Germany Purchasing Managers’ Index Composite Output came in at 47.8 in December, up from a nine-month low in November of 47.2 but still comfortably below the 50.0 threshold that separates growth from contraction. Service business activity rose slightly (index at 51.0), having fallen for the first time in nine months in the middle of the fourth quarter. But this did not compensate for the sharp and accelerated decline in manufacturing production in the largest Economy in the Eurozone (index at a three-month low of 41.7).

Survey data continued to indicate widespread weakness in underlying demand. New business flows showed the sharpest decline since September as declines accelerated in the two monitored sectors. The decline was particularly sharp in the manufacturing sector, where new orders posted the sharpest decline in three months amid reports of customer hesitation, strong competition for new work and falling demand from abroad.

In a sign of the lack of pressure on business capacity, December saw another significant reduction in backlogs as companies were able to process and complete new orders much more quickly than they were receiving. The decline in existing business was led by the commodity production sector again.

Job losses slow as inflationary pressures rise

The pace of job losses in factories slowed slightly to the weakest in four months. Employment in the services sector also declined, albeit slightly, extending the current series of contractions in the combined workforce to seven months.

Reports of layoffs and hiring freezes aligned with uncertain business expectations. Although output forecasts for next year rose more than September’s low, they remained weaker than the long-term average as companies expressed concerns about political uncertainty, a stagnant economy and problems in the auto sector. Sentiment was particularly weak in the manufacturing sector.

Turning to prices, December saw a further rise in inflationary pressures. Input costs rose at the fastest rate since April, reflecting a combination of a sharper rise in operating expenses for services and a slower decline in manufacturing purchase prices. The story was similar for average prices, which recorded the largest increase since February, driven by a sharp and accelerating rate of price inflation in the service sector.

Commenting on the preliminary PMI data, Dr Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:

“The German service sector seems to be preparing for a better-than-expected Christmas season. The business activity index returned to growth territory after falling below 50 in November. Companies were also able to raise their selling prices a bit more than the previous month. This improvement in services represents a good balance to the rapid decline in manufacturing output, giving some hope that GDP may not have contracted in the fourth quarter.

“The manufacturing sector did not offer any festive cheer. Output fell much faster than the previous two months, and new orders fell at one of the fastest rates throughout the year. This is certainly not a big shock, given all the negative news.

How important is the Services PMI for the German economy?

The Purchasing Managers’ Index (PMI) is critical to the German economy for several reasons:

Economic Index: The PMI serves as a key indicator of the health of the economy. A PMI above 50 indicates expansion, while below 50 indicates contraction. This helps gauge economic trends ahead of time.

Business Sentiment: It reflects purchasing managers’ sentiment regarding business conditions, which can influence investment decisions and economic activity.

Sector Insights: The PMI provides insights into specific sectors, such as manufacturing and services, helping policymakers and analysts understand where growth or weakness is occurring.

Investment decisions: Investors and analysts closely monitor PMI data to make informed decisions about investments in stocks, bonds and other markets.

Policy implications: Central banks and government policymakers use PMI data to inform monetary and fiscal policies, helping to proactively address economic challenges.

Labor market insights: Changes in the PMI can indicate employment trends, with expanding companies typically hiring more employees, while shrinking sectors may lead to job losses.

Stock movements: Strong PMI readings can drive up stock prices, especially in growth-related sectors such as manufacturing and services. While weak readings may lead to a decline in stock prices.

Impact on bonds: If the PMI shows an economic contraction, investors may turn to buying government bonds, leading to higher bond prices and lower yields.

Currency rates: PMI can affect the value of a currency. Positive data may strengthen the currency, while negative data indicate currency weakness.

Short Trades: Traders may use PMI data to identify short or long trading opportunities, based on their predictions about economic trends.

In general, the PMI is a vital tool for assessing economic performance and making strategic decisions in the German economy.

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