Sharp contraction of manufacturing
German manufacturing faced its sharpest decline in a year. The manufacturing PMI fell to 40.3 in September, down sharply from 42.8 in August. The 12-month low was well below analysts’ expectations of 42.3, intensifying concerns about the health of the manufacturing sector. German manufacturing output has been declining for months and shows no signs of recovery.
“The slump in manufacturing has deepened again, dissipating hopes of a quick recovery,” said Silas de la Rubia, chief economist at Hamburg Commercial Bank, referring to the lingering economic downturn. The sector’s struggles are weighing on the wider German economy, and weakness is starting to spread to other parts of the economy.
Slowdown in the services sector
The services sector continued to grow but showed signs of fatigue. The Services PMI business activity index fell to 50.6 in September from 51.2 in August. While still technically expanding, services sector growth has slowed for four consecutive months. Economists had expected a smaller decline to 51.0, indicating the sector is feeling the effects of broader economic challenges.
The decline in the services sector suggests the ongoing industrial slowdown is starting to affect other parts of the economy. “The weakness in manufacturing is starting to spread to Germany’s services sector,” which accounts for a large chunk of the country’s economic activity, de la Rubia said.
The economy is likely to fall into recession
The weak PMI data suggests Germany’s economy will shrink further. The economy shrank 0.1% in the second quarter and economists expect a similar drop in the third quarter, confirming a technical recession. De la Rubia forecasts the third quarter to shrink 0.2%, which would mark the second consecutive quarterly decline.
The composite index tracks both manufacturing and services, which account for more than two-thirds of the German economy. Continued weakness in both sectors has cast a pall over Germany’s near-term economic outlook.
