The German economy disappointed in mid-quarter. At 46.1, February's flash composite output index was fully 1.5 points short of the market consensus and down from January's final 47.0. The latest reading was a 4-month low and extended the run of sub-50 prints that began in the middle of 2023.

The headline fall was wholly attributable to manufacturing where the flash sector PMI dropped from a final 45.5 at the start of the year to just 42.3, a 4-month low. Manufacturing output (42.1) remained deep in contraction territory. By contrast, at 48.2, the flash services PMI rose versus January's final 47.7 but what was only a 2-month high still pointed to another month of declining business activity.

Ominously, aggregate new orders decreased by the most since last October on the back of falls in both sectors and weakness in domestic and overseas demand. Backlogs followed suit but employment was only fractionally lower, underlining the ongoing tightness of the labour market. Even so, business expectations about the coming year improved again to hit a 10-month peak due to increased optimism among service providers.

Meantime, higher wages in services lay behind overall input cost inflation rising to its highest level since last April and this masked another, albeit smaller, fall in manufacturers' costs. A similar picture was true of output prices where strength in services kept the inflation rate above its long-run trend.

In sum, the February data are again surprisingly soft and increase the likelihood of a negative handle on first quarter GDP growth. Nonetheless, the ECB will take note of another pick-up in inflation pressures so, if anything, today's report probably further bolsters chances of no change in key interest rates next month. The German RPI now stands at minus 7 and the RPI-P at minus 8, both measures showing economic activity in general slipping slightly behind market expectations.

Manufacturing has been in long contraction though January's 45.5 was noticeably better than December's 43.3. Further improvement to 46.5 is expected for February. Services, at 47.7 in January, are seen at 48.2. Consensus for February's composite is 47.6 following January's 47.0.

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.