MNI 5 THINGS: Sep German PMIs To Show Mixed But Stable Picture

By Jaspreet Sehmi

     LONDON (MNI) - Flash German PMI survey data for September, due on Friday,

will provide an insight into the state of play in the eurozone's largest economy

as Q3 draws to a close. In August, the composite PMI hit a six-month high of

55.6, continuing its recovery from a 20-month low in May. A reading above the 50

no-change mark that separates contraction from expansion implies an increase in

private sector output. While manufacturing growth decelerated (the sector's PMI

index fell by one point to 55.9 in August), the services sector - which has a

larger weighting in the composite index - saw its reading climb to 55.0 (from

54.1 in July). Median consensus projections suggest a further loss of momentum

in manufacturing activity in September, but no change in the pace of services

growth, with the composite PMI thus expected to register a slight deterioration.

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

     Steady As She Goes: After having risen robustly through 2017, with the

composite index rising to an 81-month high of 59.0 in January, a moderation in

Germany's PMI indices was clearly on the cards this year. All three indices

appear to have bottomed out during the summer and have moved within a very

narrow range over recent months, with this reduction in volatility expected to

be even more pronounced in September. In any case, Germany's PMI indices remain

comfortably above 50 and are consistent with still-healthy private sector

activity growth.

     'Composite ZEW' Suggests Strong Potential For Another Upside Composite PMI

Surprise: The more timely ZEW survey for Germany delivered another upside

surprise in September, with both the Current Situation and Economic Sentiment

indices gaining ground. MNI's analysis shows that a simple average of these two

components (generating a 'composite ZEW' index) correlates well with the

composite PMI. In our preview of August's Germany PMI survey, we highlighted the

potential for an upside surprise in the composite index, and the publication of

the data confirmed this. The markets may be in for another upside surprise on

the composite PMI in September.

     Manufacturing Sector Developments Pose Cause For Concern: The latest hard

data on the manufacturing sector showed sharp monthly declines in both orders

and output in July. Germany's economics ministry pointed out that "temporary

bottlenecks" in the approval of new passenger cars due to new emissions testing

procedures were at least partly responsible for the weak industrial performance.

Nevertheless, factory orders have declined for six out of seven months so far

this year and the pace of contraction in industrial output picked up steam in

July. Euro appreciation, less buoyant global demand and elevated concerns over

protectionism have all contributed to the recent weakness in Germany's heavily

export-dependent industrial sector. These factors, as well as Brexit-related

concerns (the UK accounts for around 7% of German exports) and emerging market

fragilities, continue to weigh on the outlook for industry. As such, anything

other than a further move downwards in the manufacturing PMI in September would

be a particularly positive surprise.

     Services Sector To Remain Powerhouse Of The Economy: The services sector,

which is less subject to cyclical fluctuations and external developments, looks

set to remain the key source of economic vitality in Germany going forward.

Indeed, with consumer and business confidence firming, financial conditions

remaining supportive and inflation still subdued, domestic demand should

continue to grow solidly in the coming quarters.

     Q3 GDP Growth Outlook: As we have highlighted previously, the quarterly

average composite PMI index appears to be a relatively good coincident indicator

of quarterly German GDP growth. If September's PMI data registers in line with

expectations, our analysis suggests that economic growth in Q3 will likely hold

steady at around the 0.5% rate registered in Q2.

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

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