By Maria Martinez and Klaus Lauer
BERLIN (Reuters) -Germany's economic downturn worsened this month as both manufacturing and services activity contracted, with signs of Red Sea disruption hitting delivery times, a preliminary survey showed on Wednesday.
Germany's services sector posted its steepest drop for five months while the decline in manufacturing output eased slightly, though the figure was flattered by longer delivery times which paradoxically boost the index.
The HCOB German Flash Composite Purchasing Managers' Index (PMI), compiled by S&P Global, fell for the seventh consecutive month to 47.1 in January from December's 47.4, below the 47.8 forecast by economists.
A reading below the 50 level points to a contraction in business activity.
The composite PMI index tracks the services and manufacturing sectors that together account for more than two-thirds of the German economy.
"Germany has faced a sluggish start to the new year," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
The manufacturing PMI rose to 45.4 from 43.3 in December, above analysts' expectations of 43.7, but still in contraction territory.
Red Sea re-routings are having an impact on supply chains of the manufacturing sector as evidenced by the strong fall in the delivery times sub-index, de la Rubia said.
Due to the inverted relationship of this sub-index with the manufacturing index, the manufacturing PMI rose above forecasts.
Despite the challenges in the Red Sea, the ongoing dip in input costs suggest higher transport expenses are not yet wielding a major influence on the total cost of consumer goods traversing this route, de la Rubia said.
Business activity in the services sector fell to a 5-month low of 47.6 in January from 49.3 in December, below analysts' forecast of 49.5.
UNCERTAIN OUTLOOK
The survey showed continued broad-based weakness in demand but with limited spillover to the labour market.
"The recession is stubborn, there is still a lot of uncertainty among companies and consumers," the new president of the German Savings Banks Association (DSGV), Ulrich Reuter, told Reuters in an interview published on Wednesday.
He said German savings banks are hoping for a gradual recovery in the spring, helped by a pickup in private consumption.
The German economy shrunk by 0.3% in 2023, due to persistent inflation, high energy prices and weak foreign demand.
Germany's Ifo institute again downgraded its 2024 economic growth forecast on Wednesday, citing uncertainty caused by changes to the federal budget necessitated by a court ruling.
The institute now expects Europe's largest economy to grow by 0.7% this year instead of 0.9%, previously forecast in mid-December. In September, it had expected growth of 1.4%.
The economic malaise is not bypassing the financial sector.
"Savings banks are also feeling a certain reluctance to lend," Reuter said. "This is primarily due to uncertainty about future developments and inflation, which remains too high."
However, he predicted this situation should ease as inflation declines and paves the way for lower interest rates.