Germany’s Manufacturing Contraction Slows; Services PMI Continues to Expand

German Growth Shows Resilience as Manufacturing Drag Eases

Germany’s economy showed signs of recovery in February as the drag from its struggling manufacturing sector eased, according to the latest HCOB Flash Germany PMI data. The composite PMI Output Index rose to 51.0 from January’s 50.5, marking a nine-month high. While the services sector continued to support growth, the manufacturing sector’s contraction slowed, offering a glimmer of hope for Europe’s largest economy.

Services Sector Maintains Steady Growth

The services sector recorded a modest expansion for the third consecutive month, with the Services PMI Business Activity Index registering at 52.2, slightly below January’s 52.5. Despite the dip, the sector benefited from solid private consumption, helping to counterbalance the downturn in manufacturing. Employment in services increased for the second month, although the overall job market remained under pressure due to deeper cuts in the manufacturing workforce.

Manufacturing Contraction Slows

Manufacturing continued to weigh on Germany’s economic performance, but the Manufacturing PMI Output Index climbed to 48.5, up from 46.3 in January. The Flash Manufacturing PMI also reached 46.1, its highest level in 24 months, signaling a potential shift towards stabilization. This improvement marked the slowest rate of contraction in nine months, driven by a reduced fall in new orders, including export demand. However, challenges remain as potential U.S. tariffs could impact the sector in the coming months.

Price Pressures and Inflation Trends

Input cost inflation showed signs of easing, with overall rates ticking down from January’s highs. The service sector maintained its pricing power despite rising labor costs, while manufacturing saw a quicker drop in purchase prices. Output price inflation remained above the long-run average, underscoring resilience in pricing strategies amid cost pressures.

Market Forecast

Looking ahead, Germany’s economic outlook hinges on the manufacturing sector’s ability to stabilize and the service sector’s continued momentum. While the GDP Nowcast suggests growth for the first quarter, caution prevails with sentiment dampened by geopolitical risks and tariff concerns. Traders should monitor developments closely, particularly around the new government’s economic policies, which could influence market stability and investor confidence.