MNI 5 THINGS: Germany August PMIs To Stabilise At Upbeat Level

By Jaspreet Sehmi

     LONDON (MNI) - Flash PMI survey data, due for release on Thursday, will

provide an early insight into how economic conditions in Germany are evolving as

we head into the latter half of Q3. In July, the composite PMI hit a four-month

high of 55.0, continuing its recovery from the 20-month low in May. A reading

above the 50 no-change mark implies an increase in private sector output. 

     While manufacturing growth accelerated (manufacturing PMI rose by one point

to 56.9 in July), the service sector lost some momentum (services PMI index

moderated to 54.1 from 54.5 in June). Median consensus projections point to a

reversal of this picture in August, with manufacturing activity expected to

decelerate slightly and  service sector activity growth seen picking up pace,

leaving the composite PMI broadly unchanged.

     Ahead of the release, we bring five points to your attention:

     Steady But Solid:

     Having moderated from the recent highs registered around the turn of the

year, Germany's PMI indices remain firmly in positive territory -- comfortably

above the 50 no-change mark that separates contraction from expansion. All three

indices look to have bottomed out in Q2, having regained momentum recently.

While consensus forecasts point to a steadying in August, this would

nevertheless be consistent with still-solid private sector activity growth in

the Eurozone's largest economy.

     'Composite ZEW' Bodes Well For Composite PMI: 

     The more timely Germany ZEW survey delivered an upside surprise in August,

with both the Current Situation and Economic Sentiment indices ticking higher.

MNI's analysis shows that a simple average of these two components (generating a

'composite ZEW' index) correlates well with the composite PMI. As such, this

suggests potential for Germany's composite PMI to deliver an upside surprise in

August.

     Inflationary Pressures Rising: 

     July's survey results showed inflation gathering steam across the

manufacturing and service sectors, with steep rises reported in both input and

output prices, with Service providers increasing the prices they charge at the

fastest rate on record in July. Input costs are being stoked by rising salaries

and more expensive raw materials. However, amid robust demand conditions, firms

have been able to pass on some of these higher costs to consumers by increasing

the prices they charge. This trend looks set to continue going forward, with

strong labour market dynamics pointing to higher wage bills for employers,

alongside a greater propensity for consumers to absorb price increases

     German Firms Cautiously Optimistic: 

     Optimism among manufacturers regarding future output growth rose to a

three-month high in July. While sentiment among service providers eased for the

fourth time in five months, it remains at levels consistent with a positive

outlook for activity over the coming year, and overall sentiment among German

private sector firms remains resilient. But concerns have been raised in recent

months over uncertainties surrounding global trade, and this is a factor which

will likely continue to limit any further gains in optimism in the near term. 

     On the other hand, the softer trend in the EUR/USD exchange rate, which has

been easing from the recent highs registered in January (when it averaged at

1.24 over the month), has been a supportive factor for sentiment, especially in

the largely export-dependent manufacturing sector.

     Implications For Germany's Economic Outlook: 

     The quarterly average composite PMI index appears to be a relatively good

coincident indicator of quarterly German GDP growth. With the composite PMI

likely to average around the 55-mark in Q3 (based on July's reading and

expectations for August and September), our analysis of the recent relationship

between these variables suggests that this would imply a quarterly GDP growth

rate of around 0.5% in Q3, following on from growth of 0.4% and 0.5% in Q1 and

Q2 respectively.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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