German output growth hits 16-month high in September

German output growth was better than expected in September, but trouble is "brewing" in the manufacturing sector, S&P Global said on Tuesday.

The Hamburg Commercial Bank flash composite purchasing managers' output index improved to 52.4 points in September from 50.5 in August, marking the fourth straight month above the 50-point no-change mark.

This PMI reading, based on a survey of private sector companies, signals an acceleration in the pace of growth, "the quickest since May 2024", noted S&P Global.

It outperformed against the FXStreet-cited consensus, which expected the composite PMI to hold steady at 50.5 points.

"Output rose to the greatest extent for 16 months, driven predominantly by a renewed upturn in the service sector. There were, however, signs of fragile demand, with the latest data indicating a broad-based decrease in inflows of new work" said S&P Global.

The flash services business activity index swung to growth in September, reading 52.5 points, improving from 49.3 in August and representing an eight-month-high. Consensus forecasts had the index reading remaining in contraction territory at 49.5 points.

The German flash manufacturing index fell to 48.5 points in September from 49.8 in August, remaining in contraction and with the pace of decline increasing. This missed the consensus estimate of 50.0 points and marked a four-month low.

The flash manufacturing output index fell to a two-month low, but remained in growth territory, as it hit 52.2 points in September, down from 52.9 in August. This indicates a slowdown in the pace of growth.

S&P Global noted that a lack of new business represented a "general theme" throughout the private sector in September.

"Inflows of new work were down in both manufacturing and services, with the former recording its first decrease in four months and one that was the most marked since January," it noted.

S&P added: "Goods producers also noted a second straight monthly reduction in export sales. The decline in service sector new business meanwhile eased slightly and was modest."

Business expectations remained positive for the year across the Germany private sector, noted S&P Global. However, the degree of confidence softened for the second month in a row, falling back under the ling-run average.

"Comments from surveyed companies showed a range of factors weighing on sentiment, including a sluggish economy, still-high levels of business uncertainty and elevated operating costs."

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said: "Trouble seems to be brewing in manufacturing. Sure, companies have been ramping up production for seven straight months, but new orders took a nosedive in September. If demand, both at home and abroad, keeps dropping, it won't be long before firms hit the brakes on production, too.

"The services sector picked up a bit of steam in September. It is back in growth territory, expanding at the joint-fastest pace we have seen all year. That is a turnaround after five months of mostly declining activity. Still, companies are not exactly bursting with confidence. They have actually dialled back their optimism a notch. Given that orders, including those from abroad, are falling again, it is not hard to see why."

The PMI features a panel of around 800 companies in the German manufacturing and service sectors. Responses were collected between September 11 and 19, with final September data published on Wednesday next week for manufacturing, and on Friday next week for services and composite indicators.