German Economy Contracts: Manufacturing & Services Hit Hard

Highlights

• Germany’s economy enters contraction territory.
• Manufacturing and services both experience slowdown.
• Employment growth weakens, inflation diverges between sectors.

Overview

In a concerning development for Germany’s economy, the latest HCOB ‘flash’ PMI® survey compiled by S&P Global has revealed a move into contraction territory in July. The downward spiral was triggered by a deepening downturn in manufacturing output, coinciding with a sustained slowdown in services activity growth.

German PMI Contracts, Manufacturing Slumps

The headline HCOB Flash Germany Composite PMI Output Index declined for the third consecutive month, plummeting to 48.3 from June’s 50.6. This was the first time the index moved into sub-50 contraction territory since January. Manufacturing production levels experienced a sharp drop, falling at the fastest rate since May 2020, as demand for goods rapidly declined.

Services Activity Slows, Demand Declines

Services activity also lost momentum, with growth reaching a five-month low. New work across the sector saw a renewed fall, leading to the sharpest drop in total inflows of new work in more than three years. Customer hesitancy, destocking, high inflation, and rising interest rates were cited as factors contributing to the decline in demand for both goods and services.

Firms Tackle Backlogs, Future Pessimism

Firms, faced with a lack of incoming new work, made significant inroads into their backlogs during July, further exacerbating the economic challenges. As a result, expectations towards future activity turned negative for the first time since December last year, with manufacturers growing increasingly pessimistic.

German Employment Growth Slows Down

The pace of employment growth across the private sector in Germany slowed considerably in July, with the overall rate of job creation being the weakest in almost two-and-a-half years. The service sector saw a slowdown in hiring, and manufacturing experienced a marginal drop in payroll numbers.

July Price Trends Show Divergence

While overall price pressures eased during July, there were divergent trends at the sector level. Input cost inflation decreased, driven mainly by a sharp drop in manufacturing purchase prices. However, service sector costs continued to rise, even at a slightly quicker rate than in June, leading to a contrast in output prices.

Economist Expresses Concerns

Commenting on the flash PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, expressed concern over the current state of the German economy. He highlighted the drastic fall in new orders and backlogs of work, which are declining at their fastest rates since the initial COVID-19 wave in 2020. Dr. de la Rubia warned that the possibility of the economy slipping into recession in the second half of the year has increased.

With manufacturers trimming their workforces and the services sector experiencing eased hiring, the unemployment rate may continue to rise. Furthermore, the services sector has experienced a surge in input and output prices in July, dampening hopes for a rapid inflation slowdown.

Germany Facing Challenges

In conclusion, Germany faces challenging times ahead, with its economy grappling with manufacturing woes and services sector growth slowdown. The sharp decline in new orders and rising inflationary pressures are posing significant headwinds. Policymakers and businesses will need to carefully navigate these complexities to foster economic recovery and stability in the coming months.