German Business Growth Slows in October as Services Lose Momentum

Germany’s private-sector economy continued to expand in October, but the pace slowed as service businesses reported a sharp loss of momentum and little improvement in new demand. The preliminary HCOB Germany Composite Purchasing Managers’ Index (PMI), compiled by S&P Global, fell to 52.8 from 53.8 in September, according to results released Friday, October 23.

The reading remained above the 50-point line separating growth from contraction for a fourth straight month, although it was weaker than the 53.3 level economists had expected in a Reuters poll. Services activity slowed considerably, while the manufacturing sector’s headline index edged higher. That split is central to the October report: overall business activity is still rising, but the recovery has become less evenly supported.

The services business-activity index dropped to 51.7 from 52.9 in September, a two-month low. The manufacturing PMI, by contrast, rose to 54.2 from 53.9, reaching a two-month high. The composite measure reflects output across services and manufacturing, rather than factory conditions alone, so weakness in services and a slower pace of factory production both contributed to the softer overall result.

The figures are an early survey signal, not a quarterly gross domestic product estimate. The flash data were gathered between October 12 and 21. As S&P Global’s explanation of the PMI methodology makes clear, companies report whether conditions have improved, deteriorated or stayed the same compared with the preceding month. A reading above 50 indicates expansion, but a lower reading above that level still signals growth, just at a reduced pace.

Services face weaker orders even as firms keep hiring

The most concerning part of the release was not that service providers stopped producing more work. Activity still increased for a second consecutive month. Instead, incoming business broadly stalled, suggesting that companies had less fresh demand to sustain their recent gains. Firms reported that customers were postponing decisions and working within tighter spending budgets.

That distinction matters for the months ahead. An increase in current business activity can reflect orders received earlier, work already in progress or the completion of contracts. If fresh bookings fail to pick up, businesses have less work waiting to replace completed assignments. October’s survey showed services companies drawing down unfinished work again, consistent with that pressure on their order pipelines.

Weak new business also helps explain why the services reading fell so much more than the factory headline gauge. The slowdown does not establish that Germany’s entire services economy is contracting, and the index is still above the expansion threshold. It does show that the September improvement has not yet developed into a sustained acceleration in customer spending.

Employment provided a steadier signal. Service providers added staff for a third successive month, although the increase was marginal and no faster than in September. Firms were not reporting a broad hiring surge, but neither did the survey suggest that weaker new orders had translated immediately into a reversal in service-sector employment.

There was also a gap between what businesses were experiencing and what they expected. Services firms’ confidence about activity over the coming 12 months rose to its strongest level since February. That optimism may support investment and staffing decisions, but it remains an expectation. The October reading on new work shows that an anticipated improvement in demand has not yet fully materialized.

Manufacturing PMI improves, but output growth eases

Manufacturing offered some counterweight to the loss of speed in services. The sector’s headline PMI rose to 54.2, up 0.3 points from September, indicating an improvement in overall factory business conditions. Export sales continued to provide support, even as the broader pace of growth in new manufacturing orders slowed to a three-month low.

The underlying production numbers were less buoyant than the headline suggests. The manufacturing output index slipped to 55.1 from 56.0, a three-month low, although it still pointed to a solid increase in factory output. The two gauges measure different aspects of manufacturing. A stronger headline PMI does not mean that production accelerated in October, and treating the measures as interchangeable would obscure an important detail of the report.

Factories also reported an increase in unfinished orders, in contrast to the renewed decline at service providers. Across Germany’s private sector as a whole, outstanding business was broadly unchanged. This suggests that manufacturers retained some work in their pipelines, but the extra activity was not large enough to prevent the combined economy from losing momentum.

The staffing figures remained restrained. Manufacturers continued to reduce employment, though only slightly, with the smallest workforce decline in more than three years. Together with limited hiring in services, that points to a labour market that is stabilizing gradually rather than one responding to a pronounced boom in orders.

Phil Smith, economics associate director at S&P Global Market Intelligence, characterized the survey as evidence of a continuing upturn whose foundations remained fragile. The differences between factory orders, actual output and service-sector demand support that cautious interpretation without suggesting that another downturn has already begun.

Higher input costs complicate the growth outlook

Price pressures were uneven. Manufacturers reported a second consecutive acceleration in input-cost inflation, taking the pace to its highest since May. Businesses pointed to more expensive oil, raw materials and electronic components. Rising costs can weigh on margins when suppliers are unable to pass the full increase on to customers, particularly if order growth is already slowing.

Service providers, meanwhile, reported a moderation in input-cost inflation, partly associated with fuel discounts. Selling-price increases across the combined private sector eased to a seven-month low as companies cited competitive pressure. The pace of output-price inflation nonetheless remained above its long-run average. Slower increases in what businesses charge are therefore not the same as a general fall in prices.

The wider inflation backdrop helps explain the caution in the survey. Germany’s Federal Statistical Office reported that consumer prices were 3.3% higher in September than a year earlier, up from a 2.9% annual rate in August. Energy prices increased 14.9% year on year. The September figures predate an energy-tax reduction that took effect on October 1, so they should not be treated as a measure of the effect of that later policy change.

A survey of companies’ costs and a consumer inflation report describe different parts of the pricing process. Manufacturers can face an increase in their input bills at the same time that service firms report some relief, and neither observation establishes how the next monthly consumer price index will move. The clearest message from October is that firms are operating with continued price uncertainty, not that inflation has uniformly accelerated or eased.

Confidence also moved in opposite directions. Service-sector expectations strengthened, but manufacturers’ outlook fell to its weakest since July as renewed cost pressure clouded the picture. That divergence leaves the industrial recovery dependent in part on whether export demand and other new orders remain strong enough to absorb higher production expenses.

The next useful cross-check comes on Monday, October 26, when Germany’s ifo Institute is scheduled to publish its October Business Climate Index. Its broader survey of current conditions and expectations will offer another view of whether the private-sector recovery is gathering support or continuing at a slower pace.