The German economy began 2024 on a surprisingly soft note. At 47.1, the flash composite output index was 0.7 points short of the market consensus, 0.3 points below its final December reading and quite well in contraction territory. This was its weakest outturn in three months and its seventh straight sub-50 print.

The headline fall was wholly attributable to services where the flash sector PMI dropped from a final 49.3 at year-end to 47.6, a 5-month trough. By contrast, its manufacturing counterpart rose from 43.3 to 45.4, an 11-month high albeit still well below the 50 growth threshold. Within this, output (46.0 after 43.8) claimed an 8-month peak.

Aggregate new orders decreased for a ninth straight month and backlogs extended their unbroken slide that began back in August 2022. However, while employment also fell again, the decline was only very modest and business expectations about the coming year improved for a fourth successive month. That said, they remained historically soft.

Meantime, overall input costs rose by the most in nine months on the back of a sharp increase in services and, of note, the improvement in delivery times stalled in part due to the re-routing of sea traffic away from the Red Sea. Even so, output price inflation eased from December's 6-month high as prices increased less markedly in services and fell again in manufacturing.

Overall, the January update is disappointing and could presage another negative handle on quarterly GDP growth. Nonetheless, the ECB will take note of recent inflation developments and to this end, today's data further bolster the likelihood of no change in key interest rates tomorrow. The German RPI now stands at minus 28 and the RPI-P at minus 29, both measures showing economic activity in general failing to keep up with market expectations.

Manufacturing, at 43.3 in December, has been in long and deep contraction. No significant improvement is expected for January where the consensus is 43.7. Services, at 49.3 in December, are seen at 49.5. Consensus for January's composite is 47.8 following December's 47.4.

The flash Composite Purchasing Managers' Index (PMI) provides an early estimate of current private sector business activity by combining information obtained from surveys of around 1,000 manufacturing and service sector companies. The flash data are released around ten days ahead of the final report and are typically based upon around 85 percent of the full survey sample. Results covering a range of variables including manufacturing output, employment, new orders, backlogs and prices are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The report also contains flash estimates of the manufacturing and services PMIs. The data are produced by S&P Global.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' manufacturing indexes, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.