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Germany’s private sector companies reported encouraging signs of a pick up in May, pushing a closely-watched survey of activity to a five month high.

The composite purchasing managers’ index, which is produced by Markit and combines surveys of activity in the manufacturing and services sectors, rose to 54.7 for May from 53.6 the previous month and far better than a reading of 53.9 expected by economists. May’s reading also represents a five-month high.

This came as the manufacturing PMI jumped to a better than expected reading of 52.4 from 51.8 in April – well above the crucial 50 mark that divides contraction and expansion.

But Markit economist Oliver Kolodseike warned the latest PMI readings should be viewed “with some caution”, particularly as some companies cautioned they were struggling to win new business.

Mr Kolodseike explained:

A first look at today’s survey results is encouraging, as output growth accelerated for the first time in 2016 so far. However, we should not be too complacent about these numbers and should instead view them with some caution. There was evidence that some companies raised activity levels in order to process backlogged work, rather than as a result of rising new business.

Although new order intakes continued to increase, the rate of growth was the weakest in ten months, with occasional mentions from panellists of an increasingly challenging demand environment. “There was also an interesting development on the prices front. Input prices rose for the first time this year so far, as the higher oil price and rising staff costs (partly linked to staff shortages) exerted some upward pressure on costs. However, businesses were reluctant to raise their selling prices in a sign of increasing competitive pressures.

Pantheon Macroeconomics’ Claus Vistesen also said the details of the latest PMI surveys were “slightly less upbeat” than the headline figures suggested:

Rising output was the main driver of the strength as firms processed work backlogs, while competitive pressures and weakness in export orders weighed on new business creation in both services and manufacturing. Employment rose, but business outstanding fell. This indicates that spare capacity is rising, which could threaten employment growth in the coming months. Input prices rose at the fastest pace in five months mainly due to higher fuel costs and wages in the services sector. Selling prices were unchanged, though, suggesting that margins fell slightly this month.

The German economy expanded by 0.7 per cent in the first quarter of the year but Mr Vistesen added that evidence so far suggests this growth rate “will not be sustained”.

From the FT
 
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