Chart of the week

Germany’s July flash PMI indices saw the manufacturing index drop 1.9 points to 43.1, just 0.1 above a low dating back to July 2012 at the height of the eurozone crisis. In contrast, the non-manufacturing index remained above 55. Not since the start of 2009 has such a wide gap been seen, the difference being that the services PMI stood at just 45 at the time.

Weak manufacturing is a eurozone affair and has pulled the region’s composite PMI down from 52.2 to 51.5, a level in line with economic growth of about 1.0%.

OUR ANALYSIS

The divergence between manufacturing and services is specific to Germany and not always the case. It can be explained by the strong cyclical nature of German manufacturing, which itself stems from high international exposure. The commentary published alongside the PMI index reading focuses on the autos sector where concerns are mounting over international, especially Chinese, demand levels and the structural changes imposed by the car of the future.

In any case, resilience in the services sector is good news. Despite the weight of manufacturing (over 20% of GDP) causing the overall economy to shrink, the weakness does not appear to be spreading to the rest of the economy, at least for the moment.

The opinion expressed above is dated July 24th, 2019, and liable to change.

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