• German February composite PMI slumps.
• German GDP contracts 0.3% in Q4.
• Ifo index shows no signs of optimism.

Germany’s manufacturing downturn has deepened in February, with activity declining at a faster pace than anticipated, amid falling local and international demand. As inflation makes goods and services more expensive, this leads to a less domestic and overseas demand. The less competitive production for exports is a major concern for Germany, as the country’s exports account for nearly half of its gross domestic product (GDP).

German February Composite PMI falls further

The S&P Global purchasing managers index (PMI) for the country’s industrial sector dropped to 42.3 from 45.5 the prior month. Thanks to the improving conditions in services, the overall business activity declined to 46.1 from 47. The data showed a decrease in output and a slump in new orders domestically and abroad.

Produced by Hamburg Commercial Bank and compiled by S&P Global, the HCOB PMI is widely seen as an accurate indicator of business conditions. A reading above 50 indicates expansion and a reading below 50 indicates contraction, which points to a recession.

German recession concerns rise

According to data revealed last Friday, German GDP fell 0.3% in the fourth quarter in comparison to the previous one and puts the country on course for its first recession since the pandemic. Germany has managed to escape a technical recession as growth in the previous two quarters was flat.

As the German economy is heavily affected by the weakness in the large manufacturing sector, last week the government revised down its growth forecast for 2024 from 1.3% to a mere 0.2%, after a contraction in 2023. The government also slashed its 2025 growth forecast to 1%, despite projections that inflation would decline down to target.

The main factors contributing to Germany’s underperformance are stemming from the manufacturing downturn, affected by the negative effects from the loss of cheap Russian gas. Additional factors that weigh are high inflation, the monetary tightening from the European Central Bank (ECB), weak global demand, particularly from China, and a court decision restraining budgetary spending.

German Ifo fails to impress

The Ifo business climate indicator rose slightly to 85.5 in February from 85.2 in January. While German sentiment improved somewhat, it remained at depressed levels amid protracted weakness and murky economic outlook in the year ahead.

German exports declined 1.4% in 2023 with the country facing export challenges for its automobile and metals sector. High interest rates and geo-political issues are slowing the recovery in the near-term.

Source: TradingView

Despite the current tough macro-economic backdrop, the DAX 40 index enjoyed a strong rally, advancing from a low of 11,862 in September 2022 to a fresh all-time high of 17,552 on Tuesday. Over the long-term, our view on the German benchmark remains positive and Fibonacci projections suggest that the next big hurdle for the index is at 18,960. However, the Relative Strength Index (RSI) has reached overbought territory, suggesting that the rally is unlikely to extend much further in the short-term and the index is vulnerable to a pull back.

1. Federal Statistical Office