MNI 5 THINGS: German PMI Data A Mixed Bag But Remain Resilient

-- Private sector business activity in Germany and the wider-Eurozone remains

robust

-- ECB still on track to normalise monetary policy, albeit in a measured fashion

By Jaspreet Sehmi

     LONDON (MNI) - Flash PMI survey data released this morning showed that

German private sector business activity growth moderated slightly in September,

with the composite index edging down to 55.3 (from 55.6 in August), mildly below

the 55.4 consensus projection. The constituent manufacturing index fell more

sharply than analysts expected (to 53.7 from 55.9 in August) while the services

index, which was anticipated to hold steady, surged to 56.5 from 55.0 last

month.

     Below, we highlight five key points following the release:

     Manufacturing PMI Falls Below Recent Average: The manufacturing PMI - which

dipped only marginally under its past three-year average in June - moved

decisively below it in September, falling to its lowest level in just over two

years. While it remains comfortably above the 50-mark, which separates

contraction from expansion, the sharp move lower is a cause for concern, even if

it is not particularly surprising given recent hard data developments and

persistent external headwinds. July data revealed a further slump in

manufacturing orders and another contraction in industrial output over the

month. Today's PMI data suggests that any recovery in factory orders and output

in the coming months is likely to be relatively restrained.

     Services Strength Keeps Growth Afloat: The situation in the services sector

is far brighter, with the services PMI rising above its manufacturing

counterpart for the first time since November 2016 and sitting at an eight-month

high. This chimes with our expectation for services to be the main engine of the

German economy in coming quarters, with the sector much more insulated from the

external headwinds buffeting industry, which include cooler global demand,

protectionist concerns, Brexit uncertainties and emerging market tremors.

     Inflationary Components Show Some Softening In September: Both the input

cost and prices charged inflation gauges retreated in September, pulling back

from seven-month highs in August. Nevertheless, firms continued to report rising

salary pressures and higher raw material prices. While energy price base effects

could see input price inflation retreat further over the coming months, rising

labour costs and increasingly binding capacity constraints suggest that

underlying inflationary pressures are gradually building. We expect this

divergence to be corroborated by the official inflation data, which should see

the headline rate trend lower and the core rate creep higher over the coming

quarters.

     Composite PMI Points To German GDP Growth Of 0.5% q/q In Q3: As we have

pointed out previously, the quarterly average composite PMI index appears to be

a relatively good coincident indicator of quarterly German GDP growth. The

average Q3 composite PMI reading (55.3) points to GDP growth of around 0.5% q/q,

following on from 0.4% and 0.5% in Q1 and Q2 respectively.

     Eurozone-wide Developments Mirror Germany: At the aggregate Eurozone level,

the manufacturing PMI dipped by 1.3 points to a two-year low of 53.3 in

September, while the services index rose by 0.3 to 54.7, leaving the composite

PMI at a four-month low of 54.2. France - the only other member state for which

September flash data was published this morning - saw its composite index fall

from 54.9 to a 21-month low of 53.6. Nevertheless, France's average Q3 composite

PMI reading still indicates that GDP growth will pick up this quarter from Q2's

0.2% q/q. At the Eurozone-wide level, Q3 PMI data point to quarterly growth of

around 0.4%, unchanged from Q2 and remaining slightly above the region's

potential growth rate. As such, the ECB remains very much on course to continue

with its policy normalisation plans. A much sharper deterioration in both the

survey and hard data would be needed to prompt the central bank to hold fire.

However, with underlying inflation still weak and external developments weighing

on the economic growth picture, policymakers will continue to stress that

interest rates will stay on hold at least through next summer.

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

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