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Germany Gathers Momentum

Markit’s latest PMI suggests Europe’s largest economy is firing on all cylinders
Germany Gathers MomentumGermany Gathers Momentum

Germany’s private sector expanded at the fastest rate this year in October, a survey showed on Monday, suggesting Europe’s largest economy is firing on all cylinders at the start of the fourth quarter after losing momentum in the previous two months.

Markit’s flash composite Purchasing Managers’ Index, which tracks the manufacturing and services activity that accounts for more than two-thirds of the economy, jumped to 55.1 in October from 52.8 in September, the highest reading since last December.

This was comfortably above the 50 mark that separates growth from contraction and far higher than all forecasts in a Reuters poll which produced a consensus prediction of 53.3. Growth in the services sector picked up again after having nearly stagnated in September, while activity at factories also increased to its highest level in just over 30 months.

Markit chief economist Chris Williamson said the political uncertainty caused by Britain’s vote to leave the European Union may have triggered the summer soft patch. “Look through the noise of Brexit and very little has changed, so the soft patch that was caused by that is now over and we’re looking at a stronger fourth quarter with nice growth of manufacturing and services,” he said.

"The eurozone economy showed renewed signs of life at the start of the fourth quarter, enjoying its strongest expansion so far this year with the promise of more to come. With backlogs of work accumulating at the fastest rate for over five years, business activity growth and hiring look set to accelerate further as we head towards the end of the year.

"October’s PMI is consistent with a quarterly GDP growth rate of 0.4%, led by a 0.5% pace of expansion in Germany," he said.

Orders Rise

Companies enjoyed the sharpest rise in new business so far this year, encouraging them to add to their payroll numbers to the greatest extent in just over five years. The PMI survey adds to a string of positive data in recent weeks that suggests the German economy is likely to grow faster than originally expected in the second half.

Business morale hit a 28-month high in September, while industry orders—which have been weak so far this year—also rose more than expected in August, indicating the industrial sector may undergo a recovery in coming months.

France’s long-struggling manufacturing sector also unexpectedly returned to growth in September although overall private sector activity expanded at a slower pace due to weaker than forecast service sector business .

Markit said that its flash monthly purchasing managers index for activity in the manufacturing sector rose to a 10-month high of 51.3 this month from a final September figure of 49.7.

That was better than economists’ average forecast for 50.0, which also happens to be the level that demarcates an expansion in activity from a contraction. In contrast, the service sector index eased back to a three-month low of 52.1 from 53.3 in September, confounding expectations for a reading of 53.0.

The slower pace of service sector activity meant that the composite index for overall business activity slipped to 52.2 from 52.7, matching economists’ average forecast for this month. “I’m not too disappointed by this cool down in the number, there are signs the situation is going to improve—and potentially quite markedly,” Williamson said.

Commenting on the results, Oliver Kolodseike, an economist at IHS Markit said: "The German economy has entered the fast lane again at the start of the fourth quarter, with output growth accelerating from September’s recent low. The improvement in the PMI in October lifts hope that the weaker expansions we have seen in the past two months were just a temporary soft patch, rather than the beginning of a serious slowdown."

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