German manufacturing sector suffers worst performance for seven years

The German manufacturing sector suffered its worst performance in seven years in July, with new orders falling at the fastest pace in a decade amid weakness in China and the automotive sector, according to data released on Wednesday.

IHS Markit's flash manufacturing purchasing managers' index fell to 43.1 from 45.0 in June, hitting a seven-year low and missing expectations for a reading of 45.2.

Phil Smith, principal economist at IHS Markit, said: "The health of German manufacturing went from bad to worse in July, according to the flash PMI data, raising the risk of the euro area’s largest member state entering a mild technical recession.

"The performance from Germany’s goods producers in July is the worst recorded by the survey in seven years, with the renewed weakness mainly stemming from an accelerated drop in export orders - the most marked seen in over a decade. "

The composite PMI - which measures the performance of both the manufacturing and services sectors - fell to 51.4 this month from 52.6 in June, undershooting expectations for a 52.3 reading and marking the worst level since March. Still, it remained above the 50 level that separates contraction from expansion.

Germany's services PMI fell to 55.4 in July from 55.8 the previous month, coming in slightly ahead of expectations of 55.3.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said the figures are "ugly" and "manufacturing is sinking without a trace".

"We’re tempted to copy-paste our comments from last month’s note to make life easier for ourselves this morning," he said.

Vistesen said that while the German services sector is "doing fine", the manufacturing sector "is in an outright tailspin" and the latest PMI has comfortably reversed last month’s attempt at a rebound.

"The continued slowdown in manufacturing means that work backlogs and employment fell further, though this headwind was somewhat offset by gains in services. The key point here really is that the slowdown in manufacturing is now so severe that it almost surely will hit the official labour market data soon, which could change the political story, re fiscal policy, too."