German services sector expands

Mon, Jan 24, 2011, 00:00

Germany's private sector expanded this month at its fastest rate since June 2006 after business in the services industry offset a dip in activity among manufacturers, a purchasing managers' survey showed today.

The flash estimate from data compiler Markit showed a composite reading for January of 61.0, the second highest index reading on record and yet another signal that Germany's economy is pulling away from most of its euro zone competitors.

"Manufacturing growth spilled over to the service sector, so we're seeing good demand for business-to-business as well as consumer-oriented services - they're beginning to thrive as confidence on the outlook of the country improves," said Markit economist Chris Williamson.

The data supports Friday's report from the Munich-based Ifo Institute that showed German business morale rose in January to its highest level in 20 years. It also reinforces the view that Germany's economy is striding ahead, leaving smaller euro zone states like Ireland and Portugal behind as they struggle with austerity measures to try and contain a debt crisis.

"Whereas the PMI tends to look at the monthly change, Ifo is a better reflection of the overall level of confidence," Mr Williamson explained, adding that Markit's current PMI data implies a growth rate of nearly 1.5 per cent for the first quarter - nearly twice that of the euro zone overall.

While manufacturing purchasing managers were surprisingly more downbeat compared with December, according to Markit, growth at Germany's services providers accelerated to a pace last seen back in June 2006.

Business expectations in the services industry hit its highest level since December 2003, while new business posted a fresh all-time high for the series, which began in June 1997.

Purchasing managers participating in the Markit survey highlighted a worrying trend among manufactures that profitability could come under considerable pressure in the months ahead.

The monthly reading for manufacturing input prices rose to a level that if confirmed by the final PMI due later in January, would be the highest on record.

By comparison, the prices of goods sold to customers edged lower, opening up a record gap between the two.

"We've only been collecting output price data since September 2002 but over that period that's been the highest differential we've had in the two," said Markit's Williamson.

Since corporate margins cannot sustain such a hit over the longer term, it may be only a matter of time before price pressures are shifted down the chain and trigger inflationary risks, he added.

"Two indicators of their ability to pass on these price increases are the indexes for backlogs of work and delivery times, which tell you about supply constraints. And they suggest the manufacturing economy is overheating," he added.

Buoyant exports to emerging markets helped Europe's largest economy expand at the fastest pace since reunification in 2010, and forecasters like Commerzbank believe Germany's output could even increase another 3 per cent this year.