German manufacturing growth at record

Record growth in Germany's manufacturing industry powered a strong expansion of its private sector in February, a purchasing managers' survey showed today, defying fears the recovery could be easing.

The flash estimate from data compiler Markit showed a reading for the manufacturing sector of 62.6, an all-time high for the series, which began in April 1996. Readings above the 50 mark denote expansion and those below it point to contraction.

"Exports are driving growth in the manufacturing sector, but there is also gathering momentum in the domestic economy," said Chris Williamson, an economist at Markit.

Service providers also signalled strong growth in business activity, with the rate of expansion only fractionally slower than the near four-and-a-half year high seen in January.

"There is a very high expansion in the services sector which is very dependent on household spending, so it's a good indicator that the domestic economy is picking up," said Williamson.

The Markit flash estimate for the services sector expansion fell slightly to 59.5 in February from 60.3.

"You could find that we are hitting some short-term capacity issues in Germany which are limiting growth," said Mr Williamson. "There are backlogs of work arising at a record pace, but employment growth slowed and we can count a number of instances in which there were difficulties in recruiting staff."

A composite reading that includes both services and the manufacturing sector rose to 61.5, equal to the survey-record high posted in June 2006.

Analysts are watching the German and broader euro zone economy carefully for signs of whether momentum can be maintained in the face of easing growth elsewhere and public spending cutbacks.

Data last week showed German industry orders and output fell in December but Williamson dismissed this as a "blip" partly due to bad weather, and said the recovery remained well on track.

He said Markit's current PMI data implied a growth rate of 1.2 per cent for the first quarter, versus 0.7 per cent for the euro zone overall, "but it could be even stronger if that fourth quarter number was depressed by bad weather."

Mr Williamson tempered fears that Germany's economy was leaving smaller euro zone states like Ireland and Portugal behind as they struggled with austerity measures to contain a debt crisis.

"What we are hopefully seeing is that the strong growth in Germany is now benefitting other countries in Europe and not just immediate neighbours," said Williamson.

Strong growth in Germany, however, was fuelling inflationary pressures, with input price inflation in the manufacturing sector by far the fastest seen in the survey history.

Mr Williamson said these input price pressures were feeding through to selling prices, and would likely put pressure on wages too, especially given the robust labour market.

"There are signs of difficulties recruiting staff in the services sector and the manufacturing sector is employing people at a record rate," he said. "This sort of employment growth rarely lasts for long without generating pay pressures."

Some economists fear demands for wage hikes will lead to a wage-price spiral. Volkswagen and German unions agreed to a hike of 3.2 per cent earlier this month, which raises the prospect of other sectors gaining similar inflation-busting increases this year.

Reuters