German Private Sector Growth at 25-Month Low

Published: Tuesday, 23 Aug 2011 | 5:16 AM ET

Getty Images Analysts are worried that the euro zone's growth engine is stalling.

German business sentiment readings were also much weaker than expected, at - 37.6 in August from -15.1 in July and against expectations of -25, sending the euro lower and boosting prices of German Bund futures.

Markit's German composite output index — a snapshot of the economy's health that combines services activity with manufacturing output — dropped to a flash reading of 51.3 from 52.5 in July, data showed on Tuesday.

The reading was the lowest since July 2009, remaining just above the threshold of 50 that separates growth from expansion, thereby indicating only a marginal rise in business activity.

" The euro area's main engine of growth is stalling," said Chris Williamson, an economist at Markit. " This is a dramatic turnaround for Germany."

Germany has been one of the best-performing economies in the industrialized world since the end of the 2008 financial crisis.

Yet gross domestic product growth slowed more than expected in the second quarter to just 0.1 percent, raising questions over whether Europe's top economy can continue to drive growth in the region.

" At best we can expect stagnation in the second half of the year unless business confidence can improve," said Williamson. " And there is a possibility of contraction if there is nothing to help boost confidence."

The survey was consistent with forward-looking German indicators that have also been downbeat of late. The all-important Ifo index, considered the best indicator of future underlying economic trends in Germany, is due on Wednesday. Economists predict a drop in business morale.

The Markit survey showed that the composite index for German orders fell for the first time in two years, while the sub-indices for new orders in the services and manufacturing sectors read 47.8 and 48.7 respectively.

" There are a number of factors one is that Germany is a big exporter and there has been a dramatic turnaround in the export market, while the domestic market is also looking weak," said Williamson.

Exports fell in June, the latest trade data showed, due to a worsening global economic climate. The PMI index tracking the manufacturing sector stayed at 52.0, while a measure of the services sector slid to 50.4, the data showed.

Economists in a Reuters poll had forecast respectively 50.8 and 52.0. More worrying, said Markit's Williamson, was the fact that service providers were downbeat about the outlook for the year ahead for the first time since April 2009, with the sub-index for business prospects dropping at a record rate.

A slowdown in the economy is likely to have an impact on employment, Williamson said, defying surprisingly strong German job creation over the past two years.

The sub-index for private sector employment still pointed to solid growth, yet backlogs of work contracted for the second month running.

" There are signs spare capacity is building up and headcounts are most likely going to be trimmed," said Williamson.

Meanwhile growth in input and output prices eased, which could reassure European Central Bank hawks concerned about a recent spike in inflation.

" It certainly looks like the worse is very much over, the input prices index came down to 55.7 from over 70 in February, which is a huge difference," said Williamson. " So talk will quite soon move from inflation to deflation worries."

 
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