Germany is the sick man of Europe no more. Thanks to its service sector, it now appears that it will exit recession, and the economic future could be bright. The PMI data for April surprised on the upside for Germany, led by the service sector, which has also boosted the overall Eurozone PMI reports. However, the manufacturing sector has crashed and burned at the start of the new quarter, while the service sector has surged, suggesting that the consumer is doing the heavy lifting as we move through 2024.

Service sector to boost global growth

The service sector seems to be a catalyst for the entire global economy in April, with strong expansion in the service sector PMIs for Germany, the UK and the Eurozone as a whole. The German service sector PMI rose to its highest level since July last year, and the composite figure was above 50 for the first time in ten months. This suggests two things. Secondly that Germany’s recession was driven by the manufacturing sector, and secondly, that the bounce back in growth is all down to services.

No green shoots for the Manufacturing sector yet  

The detail of the German report also showed some interesting developments. The manufacturing index contracted yet again; however, it was the slowest rate of contraction for a year. However, new orders for factory business fell to their lowest level for 5 months. Total new business also continued to fall, but there are signs that this is bottoming out. There was a drag from export business in the German PMI, however, even this rate of decline was the weakest for 12 months. All in all, this suggests that the manufacturing sector is still a drag on German economic growth, and although there are signs that this is bottoming out, we are yet to see conclusive evidence.

Inflation pressure could be moderating

The employment situation reported in Germany’s PMIs for April also showed contrasting fortunes for the service and manufacturing sectors, with the service sector adding employees, and the manufacturing sector shedding staff for another month. On a positive note, price gains were noted both for input and output prices. However, they were roughly within their long term averages, which suggest that inflation pressure is moderating.

Is Germany bouncing back?

The big question that arises from this data is whether or not Germany has emerged from recession. Tuesday’s data suggest that Germany has a two-speed economy, with a weak manufacturing sector and a strong service sector. In fact, the latter may have skirted a recession altogether, according to S&P Global. Service companies are confident in Germany, and this could be a catalyst for an economic recovery later this year. However, the manufacturing sector remains in the doldrums, and is unlikely to contribute to growth in the near time. This means that Germany is starting to look like many other global economies, including the UK and US, and is reliant on the service sector and its consumer, to boost future growth. It could also reinforce the recent trend of contracting goods price inflation, while service prices continue to rise, and dent hopes of interest rate cuts.

Can German stocks benefit from a return to growth?

The immediate reaction to the German data has been felt most keenly in the stock market. The Dax is leading the way in Europe and is encouraging positive risk sentiment. The MDax, Germany’s mid-cap stock index, has underperformed the blue-chip German stock index for most of the past year, however, it has turned higher in recent days, and if the German economy recovery continues then the mid-cap index could outperform the large cap Dax in the medium term.

The outlook for the Euro

The euro staged a mini recovery on Tuesday and EUR/USD is currently back above $1.0650. The euro is the second-best performer in the G10 FX space this week, suggesting that the euro has a positive correlation to improving risk sentiment. Interestingly, it may move higher alongside stocks. However, there could be a cap on EUR/USD strength. German bond yields are lower on the back of the PMI data. The spread between US and German 2-year yields is actually higher today, which could erode short term support for the euro in the near term. Key resistance for this pair lies at $1.0700, which was rejected earlier today.

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