German services PMI improves, October saw a slight improvement in output, despite deepening job cuts and reduced pricing power at companies. According to the latest HCOB Flash Purchasing Managers’ Index® (PMI®), compiled by S&P Global, the German services sector’s business activity index rose to 51.4, up from 50.6 in September, the highest level in three months.
The data was collected from October 10 to 22, and pointed to a continued deterioration in the private sector at the start of the fourth quarter, with companies reporting further declines in output and employment amid weak underlying demand. Although the decline in output was slightly slower in October, the decline in employment picked up speed, showing the sharpest decline in labor force numbers in nearly four and a half years. While business expectations rebounded after turning negative for the first time in a year in September, optimism remained muted by historical norms.
It is worth noting that the latest data showed almost complete stability in the average prices charged by German companies, as the services sector saw a slowdown in inflation, with the deepest cuts in industrial output prices since September 2009. The HCOB Flash Germany composite industrial output index rose from a seven-month low of 47.5 in September to 48.4 in October, but remained below the 50.0 mark that separates growth from contraction, a state that has persisted since July.
However, the rate of decline in industrial production remains historically sharp, with the index at 42.4, a slight slowdown from the rate seen in the previous month. At the same time, the services sector showed some resilience, recording higher business activity for the eighth consecutive month, with modest growth (the index at 51.4).
The weakening demand and its impact on the services sector and employment in Germany
In October, survey data showed that underlying demand remained weak, with new business inflows falling sharply for the fifth consecutive month. The services sector saw a second consecutive monthly decline in new business, partly due to the difficulties faced by the goods-producing sector. However, the rate of decline in new orders slowed compared to September. The manufacturing sector was the most affected, as customers were reluctant to spend due to increased economic uncertainty, coupled with weak demand in the automotive sector.
The decline in new orders was clearly reflected in a significant decline in existing business in October, which prompted companies to reduce hiring capacity, recording a fifth consecutive month of employment declines. Job losses also reached their fastest pace since June 2020, driven by a large decline in manufacturing plants and increased job losses in the services sector.
Despite the decline in hiring, business expectations rose, with more companies optimistic about activity in the coming year than pessimistic ones, reflecting the negative sentiment that prevailed at the end of the third quarter. This improvement was mainly due to a recovery in optimism in the services sector, while manufacturing sentiment remained depressed at an 11-month low.
On the inflation side, German product prices were broadly stable in October. Although service prices continued to rise, the rate of increase slowed to a three-and-a-half-year low, while goods producers offered deep discounts, recording the biggest drop in factory charges in more than 15 years.
At the same time, input costs rose at a modest rate, settling at a 14-month low, as wage increases continued to push up operating expenses for service providers. However, the rate of inflation in the service sector remained on a downward trend, slowing to its lowest level since February 2021.
German economic outlook: Services improves, industrial struggles
Dr. Cyrus de la Rubia, Chief Economist at Commerzbank Hamburg, commented on the preliminary PMI data:
“The fourth quarter started better than expected, with services growth accelerating significantly, while the contraction in the industrial sector slowed compared to the previous month. This reflects a good growth outlook for the fourth quarter. However, the IMF expects GDP to remain flat over the year after falling by 0.3% in 2023, reflecting structural weaknesses in the German economy, such as rising energy costs, increased competition from China, and a labor shortage that is weighing heavily on the industrial sector.
It is encouraging that activity in the services sector expanded faster than in September, after a four-month slowdown. Although companies in this sector cut their workforce more than they did in September, business expectations improved significantly. This is in line with indications that German consumers have started to increase their spending over the summer, supported by higher wages and lower inflation, according to official retail sales figures. This trend appears to be continuing, with the services sector returning to being a pillar of overall economic stability.
The survey results suggest that we may be starting to see a glimmer of hope in the industrial sector. Although output is still in rapid contraction, as is employment, the pace of this deterioration has slowed slightly compared to September. More importantly, new orders, which have fallen sharply over the past two months, have lost some of their negative momentum. The industrial sector is likely to remain stagnant in the fourth quarter, but it may start next year in better conditions, although this assessment based on a single monthly improvement should be taken with caution.
