German Economy Maintains Momentum as Services Growth Surges

Germany’s economy maintained its momentum this month as services growth surged to the fastest pace in almost three years, countering a slowdown at factories.

A Purchasing Managers’ Index of both industries held at 56.1 in May, close to the highest level in three years, Markit Economics said in London today. It also said the drop in the manufacturing index doesn’t alter the outlook for “solid” economic growth in Germany this quarter. The factory gauge remains above the 50 level that indicates expansion.

“Recovery prospects in Germany’s private sector continued to brighten,” said Oliver Kolodseike, an economist at Markit. “Survey data for the second quarter so far suggest that we should expect another period of solid growth.”

The services PMI rose to 56.4 in May from 54.7 in April. That’s the highest reading since June 2011 and exceeded the median forecast of economists in a Bloomberg survey. The factory gauge dropped to 52.9 from 54.1, a sharper decline than was anticipated.

Germany’s expansion accelerated to 0.8 percent in the first quarter, exceeding expectations and leading the euro area recovery. While the Bundesbank said this week that the economy will cool, that’s mainly due to weather effects and shouldn’t be seen as a decline in the strength of the recovery.

European Divergence

Germany’s performance in the first three months of the year was in contrast to that of France, the euro area’s second-largest economy, where gross domestic product stagnated. The divergence between the two was further highlighted today, with a report from Markit showing that both manufacturing and services in France shrank this month. The factory index fell to 49.3 from 51.2, while the services measure declined to 49.2 from 50.4.

Germany is outperforming the 18-nation economy sharing the euro, which failed to gather momentum in the three months to March. Mediocre expansion has added pressure on the European Central Bank to ease policy in June after President Mario Draghi said this month officials feel “comfortable” to act.

The ECB’s Governing Council will announce its next interest-rate decision on June 5 in Frankfurt, with 90 percent of economists in a Bloomberg Monthly Survey expecting it to add stimulus. The benchmark interest rate currently stands at a record low of 0.25 percent and the deposit rate at zero percent.

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