German services sector activity grows at fastest pace in March

German services sector activity grew in March at the fastest pace since last May as demand strengthened and spurred job creation, a business survey showed.

S&P Global’s final services Purchasing Managers’ Index (PMI) for Germany rose to 53.7 in March from 50.9 in February, climbing well above the 50.0 threshold that separates growth from contraction.

“Germany’s service sector enjoyed a positive end to the opening quarter of the year, with the upturn in business activity gathering pace as demand continued to recover from the lull seen towards the end of last year,” said Phil Smith, economic associate director at S&P Global.

But he said it remained to be seen whether this was enough to prevent a second consecutive quarterly contraction in GDP, which would fulfil the technical definition of a recession.

“With business confidence stalling in March and manufacturing new orders still under pressure, modest economic growth is probably the best we can hope for in the next quarter,” Smith said.

Both the overall rate of input price inflation and the rate at which service providers raised their own prices eased but remained high by historical standards, the survey showed.

“Price increases in the service sector are easing, but even so the rate of inflation remained stubbornly high in March, pointing to persistently strong core price pressures and the potential for yet more interest rate rises,” Smith said.

The German composite PMI index, which comprises both the services and manufacturing sectors, rose to 52.6 in March from 50.7 in February. The upturn was driven primarily by the service sector, although there was also modest growth in manufacturing output.

Meanwhile the German industrial orders rose more than expected in February driven by strong growth in the vehicle construction sector.

Orders increased by 4.8 per cent on the previous month on a seasonally and calendar-adjusted basis, the federal statistics office said on Wednesday. A Reuters poll of analysts had pointed to a 0.3 per cent increase.

New orders in the manufacturing sector have risen for the third month in a row and are 7.3 per cent higher than in November 2022, the statistics office said.

Excluding large-scale orders, there was a month-on-month increase of 1.2 per cent in February.

New orders continue to recover in many sectors of German manufacturing and, in line with this, an improvement in sentiment indicators has also been observed in recent months, the economics ministry said in response to the data.

“Overall, there are signs of an economic recovery at the beginning of 2023 following the weak end-of-year quarter in 2022,” the ministry said.

Top German economic institutes are expected to announce their forecasts later on Wednesday. They see Europe’s largest economy narrowly avoiding a recession with modest growth in the first quarter, according to the forecasts seen by Reuters.

The number of positive economic reports is increasing, but a uniform picture has not emerged recently, Thomas Gitzel, chief economist at VP Bank Group said.

“The weak new orders of 2022 are yet to show their negative consequences in industrial production,” Gitzel said. Combined with continued weak consumption, this does not bode well for the near-term economic outlook, despite some signs of improvement, he added. The statistics office publishes more economic data on its website.

Meanwhile Germany is expected to narrowly escape recession and post modest growth in the first quarter of the year, according to the forecasts of leading economic institutes published on Wednesday.

The institutes said in their Joint Economic Forecasts they expect a 0.1 per cent expansion in gross domestic product in the first quarter, confirming a report by Reuters on Tuesday. This follows a 0.4 per cent contraction in the fourth quarter of 2022.

For 2023 as a whole, they expect the German economy to grow 0.3 per cent, up from a predicted contraction of 0.4 per cent in autumn.

The economic institutes predict an inflation rate of 6.0 per cent in 2023, before it slows to 2.4 per cent in 2024. They forecast that unemployment will be at 5.4 per cent this year and at 5.3 per cent in 2024.

“The impact of the weakening of the economy during the winter on the labour market will be limited,” they said.

The forecast that the European Central Bank would take key rates to a peak of 4.0 per cent by this summer, with modest rate cuts possible from the middle of next year.

German exports started the year as a drag on the economy but a recovery is expected thanks to easing supply chain constraints and high industrial orders, they noted.

The institutes estimate exports to have fallen 0.7 per cent in the first quarter of the year, but that should be compensated with an increase of 0.9 per cent in the second quarter.

In 2023 as a whole, exports are predicted to grow by 0.6 per cent. In 2024, there will a bigger rise of 3.4 per cent.