Germany’s economic contraction eased slightly in December, offering a glimmer of hope amidst a prolonged downturn, according to the latest Purchasing Managers’ Index (PMI) data released by S&P Global. While business activity continued to contract for the sixth consecutive month, the pace of decline slowed, suggesting a potential bottoming out.
The HCOB German flash composite PMI, a key indicator of economic health, rose to 47.8 in December from 47.2 in November. While still below the 50 mark that separates growth from contraction, the improvement aligned with analysts’ expectations. Notably, the services sector exhibited resilience, expanding for the first time since October.
The services PMI climbed to 51.0 in December, exceeding the anticipated 49.4 and surpassing the 49.3 recorded in November. This positive development suggests a potential offset to the ongoing weakness in the manufacturing sector, raising hopes that Germany might avoid a contraction in GDP during the final quarter of the year.
Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, highlighted the significance of the services sector rebound, stating, “This improvement in services is a good counterbalance to the quicker decline in manufacturing output, giving some hope that GDP might not have shrunk in the last quarter of the year.”
Despite the positive signs in services, the manufacturing sector continued to struggle. The manufacturing PMI dipped slightly to 42.5 in December from 43.0 in November, falling short of the projected 43.3. This persistent weakness reflects the challenges faced by German manufacturers, including increased global competition, subdued demand, and a broader industrial slowdown. De la Rubia acknowledged the manufacturing sector’s ongoing difficulties, noting the prevalence of “negative news about companies planning restructurings.”
Germany narrowly averted a technical recession in the third quarter of 2023. However, the government anticipates a 0.2% contraction in overall output for 2024, positioning Germany as a potential laggard among major global economies. Further complicating the economic outlook is the political uncertainty following a budget dispute that dissolved the ruling coalition, necessitating snap elections in February. This political instability adds another layer of complexity to the challenges facing the German economy.
In conclusion, while December’s PMI data reveals a slight easing in Germany’s economic downturn, significant challenges persist, particularly in the manufacturing sector. The resilience of the services sector offers a positive counterpoint, potentially mitigating the overall negative impact. The coming months will be crucial in determining whether this nascent recovery can gain momentum amidst ongoing global economic headwinds and domestic political uncertainty.
