BERLIN (Reuters) – German manufacturing contracted further in March, a survey showed on Friday, compounding fears that unresolved trade disputes are exacerbating a slowdown in Europe’s biggest economy.
After nine successive years of growth, the German economy is facing trade conflicts between the United States and both China and the European Union as well as weakening economic activity in the euro zone.
IHS Markit’s flash composite Purchasing Managers’ Index (PMI) measuring activity in services and manufacturing, which together account for more than two-thirds of the economy, fell to 51.5, it lowest reading since June 2013.
The fall was mainly driven by the weakest activity in manufacturing since August 2012. That sub-index fell to 44.7, remaining below the 50.0 mark separating growth from contraction for a third straight month.
Growth in services slowed to 54.9, after rebounding to 55.3 in February.
Markit economist Chris Williamson said the diverging trends raised the question of how long services can continue to provide impetus for the economy and help it avoid a recession.
“As long as you get growth in the services sector you can avoid a wider recession,” he said.
“When you look at the employment trend and new orders, they pose a downside to the outlook. They look like they will subdue business confidence further and lead to a further retrenchment of spending by businesses and consumers, raising the risk of a recession.”
The survey showed that manufacturers had laid off people in March, the first such development in three years. New orders contracted for the sixth time in a row.
Williamson said manufacturing contracted 1 percent in the first quarter, compared with a 1.7 percent expansion in services. That suggested the economy grew by 0.2 percent in the first quarter, he said.
In addition to trade hostilities, manufacturing is also facing the risk of Britain leaving the European Union without an agreement on the terms of its departure.
Germany narrowly avoided a recession in the fourth quarter, when growth stagnated after contracting in the third quarter.
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.
(Reporting by Joseph Nasr, editing by Larry King; ((Joseph.Nasr@thomsonreuters.com; +49 172 678 5836; Reuters Messaging: joseph.nasr.thomsonreuters.com@reuters.)