Business activity contracts through third quarter in Germany

by | Sep 22, 2023

(Sharecast News) – Private sector business activity remained in contraction territory in the third quarter, according to Friday’s HCOB flash Germany composite purchasing managers’ index (PMI) output index.
It showed a minor improvement in September, rising to 46.2 from August’s 39-month low of 44.6.

Despite the slight uptick, it still significantly declined business activity.

The manufacturing sector suffered the most, dropping its output index to a 40-month low of 39.2, marking the steepest production fall since May 2020.

On the other hand, services activity contracted marginally, with an index score of 49.8.

“The German services PMI stopped its slump and nudged up near 50 in September,” said Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

“This is a pleasant surprise, to be sure.

“However, in terms of growth, activity remained broadly flat following the decline recorded in August.

“Therefore, our nowcast for services, which considers the PMI data, continues to signal a drag in the third quarter.”

A consistent drop in demand for goods and services was driving the downturn, as total new work inflows saw a decline for the fifth month in September.

The contraction rate was the most rapid since the initial outbreak of the Covid-19 pandemic in early 2020.

The services and manufacturing sectors witnessed considerable drops in new orders, especially from foreign clients.

“It’s no secret that the German manufacturing sector has been going through the wringer lately,” Dr de la Rubia said.

“The HCOB PMIs, however, indicate that things aren’t going downhill as fast as before, with the decline in new orders slowing down.

“In addition, the reduction in purchasing activity is losing momentum.

“Still, our nowcast for manufacturing production, which includes the PMI figures, is hinting at a drop of more than two per cent compared to the second quarter.”

Challenges also arose in the pricing domain, with firms seeing their pricing power diminish as output charges increased at their slowest pace since February 2021.

Service providers did continue to hike prices, but the inflation rate plummeted to a 28-month low.

In stark contrast, factory charges decreased for the fourth consecutive month, hitting rates last seen in September 2009.

Simultaneously, businesses faced a surge in input cost inflation.

Rising wage pressures and escalating fuel prices pushed operating expenses in the service sector to a four-month high.

Yet, manufacturing purchasing costs, while still declining, showed a slowing rate.

“The goods sector is still jamming to that deflation tune of recent months, according to PMI numbers,” HCOB’s Cyrus de la Rubia explained.

“Looking at manufacturing input prices, they keep heading south, just not as quick as before.

“Most probably, this is due to energy prices, which have spiked over the last few weeks.

“Factory output prices, by contrast, have been cut at a marginally faster rate than the month before.”

With dwindling incoming orders, businesses saw their order book backlogs drop throughout September.

Business optimism regarding future activity plunged to a level last witnessed in November of the previous year.

Overall sentiment soured in both key sectors; however, the service sector maintained a sliver of positivity.

Notably, the employment scenario also faced turbulence.

There was a slight drop in employment by the end of the third quarter, ending a continuous job creation trend that had been ongoing since January 2021.

While manufacturing had seen a slight decrease in its workforce for three consecutive months, the services sector experienced a dip in staffing levels for the first time in over three years.

“The HCOB composite PMI confirms our view that Germany has entered once again into contraction during the current quarter, after the downturn at the tail end of 2022 and early 2023,” said Dr de la Rubia.

“Our nowcast points to a rather deep GDP slump of one per cent compared to the quarter before.

“Having said this, some important sub-indicators like new business and backlogs of work, which appear to be reaching a bottom, offer hope of an end to this slump as we hit the new year.”

Reporting by Josh White for

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