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Service firms carry German economy in January as factories stumble

Service firms carry German economy in January as factories stumble
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Fabian Bimmer(Reuters)
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BERLIN, Jan 24 (Reuters) - Growth in Germany's services sector accelerated more than expected in January, a survey showed on Thursday, compensating for the first contraction in manufacturing activity in more than four years.

The diverging trends in the sectors that together account for more than two-thirds of the economy meant that IHS Markit's flash composite Purchasing Managers' Index (PMI) rose to 52.1 from 51.6 the previous month, denoting an overall pick-up in growth.

The index measuring activity in the manufacturing sector fell to a 50-month low of 49.9, however, edging below the 50.0 mark that separates growth from contraction.

Activity in services rose to a two-month high of 53.1, up from 51.8 in December.

Markit economist Chris Williamson said it was not certain that the services sector would continue to provide growth impetus for the economy in the coming months. He pointed to anemic new orders that have fallen for four months in a row.

"Obviously foreign trade is the driving force beyond this weakness. So the manufacturing sector is going to see more weakness in the coming months," said Williamson. "Producers will start to scale back their expansion plans in Germany."

Trade tensions have hit exporters in Europe's largest economy, which posted in weakest growth rate in five years last year - 1.5 percent compared with 2.2 percent in 2017.

The economy has been relying on consumption for growth. A robust labour market, rising wages and low interest rates have been supporting the consumption-driven cycle.

But Williamson said weakness in manufacturing was likely to spread to the services sector later this year as evident in weaker growth in both new orders and hiring activities by services firms.

Phil Smith, principle economist at IHS Markit added: "Worryingly for the outlook, the recent soft patch in demand continues into the New Year... Manufacturing fell into contraction in January as the sector's order book situation continued to worsen, showing the steepest decline in incoming new work since 2012."

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(Reporting by Joseph Nasr; Editing by Toby Chopra; Joseph.Nasr@thomsonreuters.com; +49 172 678 5836; Reuters Messaging: joseph.nasr.thomsonreuters.com@reuters.net)

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