Germany’s Services Sector Contracts as Manufacturing PMI Stays Deep in Contraction

Why Is Germany’s Business Activity Declining?

Germany’s economic downturn accelerated in November, with the HCOB Flash Germany PMI Composite Output Index falling to 47.3 from October’s 48.6, its lowest level in nine months. This marked the fifth consecutive month of contraction, driven by renewed weakness in the services sector and continued struggles in manufacturing.

What Happened to the Services Sector?

The services sector fell into contraction for the first time since February, with the Services PMI registering 49.4, down from October’s 51.6. Survey respondents pointed to weaker demand and uncertainty among customers, particularly manufacturers. The downturn in new work inflows led to further reductions in activity across the sector.

Is Manufacturing Showing Any Signs of Recovery?

While manufacturing production remains in decline, the Manufacturing Output Index edged up to 43.2, a five-month high. However, this improvement reflects a slower rate of contraction rather than genuine growth. Manufacturers continue to face weak demand, resulting in reduced export orders, staff cuts, and prolonged inventory destocking cycles.

Are Inflation Pressures Easing or Intensifying?

Inflationary pressures picked up in November, with input and output costs rising at the fastest pace in three months. Service providers raised prices sharply due to higher operating expenses, particularly wages, which surged in Q3 to their highest level since 1993. Meanwhile, manufacturers reported ongoing price cuts as they struggled with sluggish demand across supply chains.

What Are the Expectations for Germany’s Economy?

Business confidence improved slightly, rising to a three-month high, particularly in manufacturing, but it remains weak by historical standards. Political uncertainty surrounding Germany’s February elections and trade tensions with the U.S. are weighing heavily on sentiment. Some firms expressed cautious optimism that a new government might implement reforms to revive the economy.

What Does This Mean for Traders?

The near-term outlook for Germany remains bearish as services activity contracts and manufacturing struggles to stabilize. Rising inflation pressures in services and weak export demand in manufacturing pose additional risks. Traders should watch for potential shifts in export orders ahead of U.S. tariff changes and track political developments that could influence fiscal policy.