FXT Financial Focus (Asia-Pacific 08/24)German Manufacturing Recovery Gains Momentum

S&P Global‘s preliminary August data showed that Germany’s economy continued to expand, although the divergence between sectors widened further. The Composite Output Index slipped from 51.3 to 51.0, mainly due to weakness in services. Manufacturing improved significantly, with the PMI rising from 52.2 to 54.1, a 51-month high, while the Manufacturing Output Index climbed to 56.7, its highest level in around four and a half years. The industrial sector has become the main driver of current economic growth.

The manufacturing recovery became more broad-based, with new orders, output and export sales all showing signs of faster growth. Inventory rebuilding generated additional demand, while increased defense spending and investment in data centers also supported industrial activity. After losing some momentum in the second quarter, the manufacturing recovery regained pace in August, indicating that German industrial demand is gradually strengthening.

Germany‘s industrial improvement also helped drive stronger manufacturing activity across the Eurozone. The Eurozone Manufacturing PMI rose to 52.8 in August, while manufacturing output reached a 54-month high. New orders grew at their fastest pace in 40 months, and export orders returned to expansion. Although French manufacturing moved back into expansion territory, its services sector remained weak, highlighting continued sectoral differences in Europe’s economic recovery.

In contrast to manufacturing, Germany‘s services sector remained under pressure, with the PMI falling from 49.8 to 48.5 and remaining in contraction for a fifth consecutive month. Weak service demand offset part of the growth in industry, leaving overall economic activity expanding only moderately. Germany’s economy currently remains largely dependent on manufacturing, while domestic demand and services have yet to provide a meaningful additional source of growth.

The labor market showed signs of stabilization. Overall employment in Germany ended a 26-month period of decline, with services firms beginning to add jobs modestly and the pace of manufacturing job cuts slowing to its lowest level in more than a year. At the same time, business expectations improved, suggesting that the recovery in orders is gradually strengthening companies confidence in future demand and the broader operating environment.

Cost pressures eased compared with July, with the increase in output prices slowing to a five-month low, although energy and supply-chain risks have not completely disappeared. Developments in the Middle East continue to affect some raw material and transportation channels, prompting some companies to make advance purchases and increase inventories to reduce supply risks. As a result, cost pressures could still fluctuate in the coming period.

From FXTRADING‘s perspective, the renewed acceleration in German manufacturing is providing a more stable industrial foundation for European economic growth, while defense spending, data center construction and improving exports could continue to generate demand. The next key factor will be whether the industrial recovery can increasingly feed through into investment, employment and a rebound in services. If this transmission gradually takes hold, Germany’s economic growth base would become more solid, while also reducing the need for the European Central Bank to adjust policy in the near term to support the economy.