German Services Activity Inch Up Despite Sharpest Drop in New Work Since June 2009

Steven Bobson, Europe & Americas Editor
August 06, 2012 /

At 50.3 in July, up slightly from 49.9 in June, the final seasonally adjusted Markit Germany Services Business Activity Index posted back above the neutral 50.0 threshold.

However, the latest reading signalled only a fractional expansion of overall business activity, and was well below the long-run survey average (53.0). July data indicated that growth was largely driven by Hotels & Restaurants and Renting & Business Activities.

The final seasonally adjusted Markit Germany Composite Output Index dipped from 48.1 to 47.5 in July, its lowest level since June 2009. The overall decline in private sector output reflected a sharp and accelerated fall in manufacturing production, which more than offset the improved service sector performance in July.

July data highlighted by a marked reduction in new business intakes in the service sector. Lower volumes of new work have now been recorded for four consecutive months and the rate of contraction reached its fastest since June 2009.

Five of the six broad areas of the service economy recorded a drop in new business during the latest survey period, with Hotels & Restaurants the exception. Meanwhile, overall new business intakes across the German private sector also declined at the fastest rate since June 2009.

Service providers signalled a decline in work-in-hand (but not yet completed) for the fifth consecutive month. The rate of backlog depletion was the steepest since November 2011, and survey respondents widely commented that lower inflows of new work had helped them focus on the completion of existing projects. The composite measure of outstanding business also pointed to the steepest decline for eight months.

German service providers remain downbeat about the prospects for business activity at their units in July. Although the degree of negative sentiment was only marginal, the latest reading was the lowest since October 2011. Companies operating in the Financial Intermediation sector were the most pessimistic, followed by Transport & Storage.

Staffing levels continued to rise at a moderate pace across the service economy in July, thereby extending the current period of expansion to three months. Four of the six broad areas of the service economy posted higher employment numbers, led by Hotels & Restaurants.

Only the Post & Telecommunications and Transport & Storage sectors recorded lower workforce numbers during the latest survey period. However, a sharp fall in manufacturing employment meant that overall
private sector workforce numbers declined for the first time since April.

Average cost burdens increased at a robust pace in the service sector during July, but the rate of inflation slipped to a three-month low. The current period of input cost inflation stretches back to
October 2009.

A number of survey respondents commented on higher energy costs in the latest survey period. Five of the six sub-sectors recorded
an increase in cost burdens, with Financial Intermediation the exception. However, a steep fall in manufacturing input prices meant that the composite measure of cost burdens pointed to the slowest overall pace of inflation for over two-a-half years.

Average tariffs in the service economy meanwhile dipped fractionally in July amid strong competition for new work. This was the first reduction in prices charged since September 2011. Manufacturers also
saw a decline in their factory gate prices, meaning that average charges across the private sector as a whole declined for the first time since August 2010.

Tim Moore, senior economist at Markit and author of the report said:
“A slightly improved services performance was more than offset by the sharp manufacturing downturn during July, meaning the fastest decline in combined German output for just over three years.

“There were also worrying signs ahead for the service economy, as new work fell at the steepest rate since June 2009 and private sector job losses were recorded for only the second time in around two-and-a-half years. This led to deeper pessimism among service providers about the 12-month ahead outlook. More immediately, July’s figures suggest that the German economy has started the quarter on a weaker platform than at any time since the 2008/09 recession.”


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