2023.01.2413:12:00UTC+00German Private Sector Downturn Eases On Cooling Inflation, Lower Recession Fears

Germany's private sector downturn softened to a stable footing at the start of the year amid a moderation in price pressures along with a renewed positive outlook on reducing recession risks and ongoing strength in the job market, flash survey data from S&P Global showed on Tuesday.

The flash composite output index rose to a seven-month high of 49.7 in January from 49.0 in December. The index was forecast to rise slightly to 49.6.

However, any reading below 50 indicates contraction in the sector.

The improvement in the composite index mainly relied on the service sector, which returned to growth for the first time in seven months. Meanwhile, the factory activity continued its declining trend in January.

The services Purchasing Managers' Index, or PMI, climbed to a 7-month high of 50.4 in January from 49.2 in the prior month. The score was forecast to increase to 49.6.

The manufacturing PMI dropped to a two-month low of 47.0 from 47.1 in December. The expected score was 47.9.

Read more: German Economy Roughly Stagnated In Q4: Bundesbank The German private sector still remained in contraction territory on account of lower demand due to multiple headwinds like steep inflation, tightening financial conditions, and investment reticence, as well as investment reticence in manufacturing. However, the overall fall in new orders was the weakest in seven months.

In addition, the easing of supply-chain bottlenecks amid falling global demand contributed to a further cooling of inflationary pressures in January.

The labor market also showed strong resilience, as employment growth picked up pace to a 6-month high.

Business confidence remained on an upward trajectory in January amid easing recession risks.

"Business confidence continues to recover from last October's low point, but it nevertheless remains subdued compared to the situation prior to Russia's invasion of Ukraine, particularly in manufacturing where we're still seeing notable weakness in new orders and perhaps the beginning of a period of stock depletion as supply-chain concerns fade," Phil Smith, a senior economist at S&P Global, said.

Read more: German Economic Sentiment Strengthens On Favourable Energy Markets

Elsewhere on Tuesday, survey results from the market research group GfK showed that Germany's consumer confidence is set to improve for the fourth month in a row in February amid the sustained recovery in both economic and income expectations as energy prices rose less sharply and the government took cost-cutting measures.

The forward-looking consumer confidence index climbed to -33.9 from -37.6 in January, which was revised from -37.8. However, economists had expected a higher reading of -33.

Private consumption will not be able to make any positive contribution to overall economic development this year and the propensity to buy continued with its ups and downs as households were expecting significantly higher amounts for their heating bills in the coming months, the Nuremberg-based GfK said.

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