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backEUROtalk May, 2012

German Manufacturing Shrinks at Fastest Pace in 3 Years

Germany's manufacturing sector has been shrinking at the fastest rate in three years in May, renewing concerns about the stamina of Europe's largest economy, which likely propped up the euro zone in the first quarter but is beginning to show signs of strain.

Markit's manufacturing Purchasing Managers Index (PMI) slid to 45.0 this month from April's 46.2, according to a flash estimate released on Thursday, falling well below the 50 mark that separates growth in activity from contraction.

It was the fastest rate of contraction since June 2009 in the sector, as new orders and exports shrank at their fastest pace this year.

The data took the shine off Germany's stronger-than-expected growth in the first quarter of this year, which saw the economy bounce back from a weak spell and helped the euro zone as a whole avoid recession, albeit by the narrowest possible margin. But as demand in the export markets that drive Germany looks increasingly fragile, and political uncertainty in Greece casts a shadow over the rest of the currency bloc, Europe's largest economy may be beginning to feel the strain.

"May's drop in manufacturing production was the steepest in nearly three years, and the current period of falling new orders now almost matches the length, though not the depth, of the contraction in 2008/09," Tim Moore, senior economist at Markit, said in a statement.

Business activity in the services sector grew at the same pace as last month with a reading of 52.2, thwarting expectations in a Reuters poll for a fall to 52.0.

However, this failed to offset the rate of contraction in manufacturing, and the composite index - which combines manufacturing and services data - dipped below the 50 mark for the first time in six months at 49.6, down from 50.5 in April.

Both new orders and new export orders in the manufacturing sector contracted for the 11th month running and at their fastest pace this year with readings of 43.6 and 43.0, respectively.

"The underperformance of manufacturing relative to services has not been as extreme since the low point of the recession in early 2009, with a key driver then as now being a steep downturn in export sales," Moore said.

Germany's export-driven economy bounced back from a slight contraction in the final quarter of last year to grow by 0.5 percent in the first quarter of 2012, preliminary GDP data showed last week. But analysts have warned of a weak second quarter ahead and a potential slowdown in demand from export markets outside of the euro zone that could expose a weak spot in the German economy.

Domestic Demand

With demand faltering in the euro zone and further afield, domestic consumption could provide an important crutch for Germany's economy through uncertain times.

Staffing levels in the services sector grew in May, reflecting increased confidence in the business outlook for the year ahead, which brightened to its highest reading since July 2011.

The GfK survey of consumer confidence data due on Friday is expected to remain stable at 5.6 points, lending some reassurance that hopes of higher wages are fuelling spending and big-ticket purchases.

"Continued service sector growth and job hiring is providing an important counterbalance to manufacturing weakness," Moore said.

"May's upturn in service providers' confidence about the year ahead is especially encouraging given the headwinds facing the manufacturing sector and ongoing worries among firms about how the euro crisis will play out," he said.

Source: CNBC.com - GAI

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