German business activity grows at accelerated clip in September, PMI shows

German business activity accelerated significantly in September, with the HCOB flash composite PMI rising to 52.4, surpassing expectations and marking its fastest pace in 16 months, largely driven by a rebound in the services sector. However, this growth was tempered by a contraction in manufacturing and declining new work inflows across both sectors, indicating fragile demand. Input costs and output charges also increased, particularly in services, leading economists to caution against complacency and warn of a potential slowdown despite the current positive headline figures.

Analysis

German business activity accelerated in September, with the HCOB flash composite PMI reaching a 16-month high of 52.4, well above the 50.0 growth threshold and analyst expectations. This headline strength, however, masks a significant divergence between sectors. The growth was driven entirely by a notable rebound in the services sector, where the PMI climbed to an eight-month high of 52.5. Conversely, the manufacturing sector contracted further, with its PMI slipping to a four-month low of 48.5. More critically, forward-looking indicators signal fragility, as new work inflows declined across both sectors. This weakness is compounded by resurgent inflationary pressures, with input costs and output charges rising at their fastest rates in several months, particularly within services. Consequently, despite the current expansion, business expectations for the year ahead have softened, reflecting concerns over weakening demand and elevated operating costs, which suggests a potential slowdown may be on the horizon.

Key Decisions for Investors

• Given the stark divergence between a rebounding services sector and a contracting manufacturing industry, investors should consider a sector-specific strategy, potentially overweighting German service-oriented companies while remaining cautious on industrial and manufacturing names exposed to declining new orders.
• The acceleration in input and output cost inflation, particularly in services, could keep pressure on the European Central Bank, potentially limiting the scope for future monetary easing. Monitor upcoming eurozone inflation prints closely as they will be critical for the interest rate outlook.
• The decline in new work inflows and softened business expectations are significant leading indicators that contradict the positive headline PMI. This warrants a cautious stance, and it may be prudent to hedge against a potential economic slowdown in Germany's economy over the coming quarters.