German economic recovery remains on course despite slacking services - PMI

BERLIN (Reuters) - Germany's service sector barely grew in September, but strong manufacturing helped the private sector in Europe's largest economy to remain on track for a solid recovery in the third quarter, a survey showed on Monday.

IHS Markit's final services Purchasing Managers' Index (PMI) fell to 50.6 from 52.5 in the previous month.

The reading, which came in higher than a flash reading of 49.1, marked the third month in a row that the services index was above the 50 mark dividing growth from contraction.

The final composite PMI covering both the services and manufacturing sectors rose to 54.7 from 54.4 the previous month. That was higher than the flash figure of 53.7.

IHS Markit economist Phil Smith said coronavirus infections in Germany had been rising to a smaller extent than in other European countries, so the impact on actual services activity had been smaller than in the likes of Spain and France.

"While the service sector is close to stalling, growth in Germany has been buoyed by a reviving manufacturing sector, which means the economy carries at least some momentum heading into the final quarter of the year," Smith said.

Germany is doing also better than most of its euro zone peers in terms of shielding the labour market from the brunt of the pandemic as there was some hiring across the service sector and a slowdown in factory job cuts, he added.

Chancellor Angela Merkel and Finance Minister Olaf Scholz have since March unleashed an unprecedented array of rescue and stimulus measures to help companies and consumers recover as quickly as possible from Germany's deepest recession on record.

The packages include unlimited liquidity aid for struggling companies, a massive job protection scheme to shield workers from sudden unemployment as well as cash handouts for parents and a temporary value added tax cut to boost domestic demand.

The German economy contracted by a record 9.7% in the second quarter as household spending, company investments and trade collapsed at the height of the pandemic.

For the third quarter, the Ifo institute expects 6.6% output growth which is seen slowing to 2.8% in the fourth quarter.

(Reporting by Michael Nienaber; Editing by Toby Chopra)