German private sector activity rises again in February

The HCOB Germany Composite PMI rose to 51 in February 2025 from 50.5 in January, slightly beating forecasts of 50.8, according to flash estimates.

German private sector activity rises again in February

The increase indicated that business activity across Germany’s private sector expanded for the second consecutive month and at the fastest pace since May 2024. The services sector continued its steady growth, albeit at a slightly slower pace (52.2 vs 52.5), while the drag from the manufacturing sector moderated to its lowest level in two years (46.1 vs 45). This suggests that while manufacturing activity remained in contraction, it was not as severe as in previous months, pointing to a stabilization of some of the pressures that had weighed on the sector earlier.

Easing supply chain disruptions boosts manufacturing activity

The improved manufacturing performance was largely attributed to easing supply chain disruptions and a stabilization in global demand, although the sector still faces challenges such as rising input costs and weakening new order growth. Meanwhile, the services sector continued to be the primary driver of growth, buoyed by strong demand in areas such as financial services, healthcare, and information technology. However, the slowdown in services sector growth from the previous month raised questions about the sustainability of this momentum in the face of ongoing economic uncertainties. In terms of employment, the overall labor market showed a modest decline, with job losses in the goods-producing sector offset by an increase in workforce numbers in services firms. The net result was a slight contraction in total employment, as businesses in the manufacturing sector were more likely to scale back hiring in response to muted demand and rising costs. Conversely, services firms appeared more confident in their growth prospects and were able to add staff to meet rising demand.

Inflationary pressures ease

On the price front, inflationary pressures eased slightly from the peaks seen in January, with input costs and output prices both ticking down. However, price increases in the services sector remained pronounced, reflecting continued strong demand in certain areas, while manufacturing saw more discounting and price reductions due to weaker demand. This dichotomy between the two sectors highlights the broader divergence within the German economy, with services benefitting from more robust consumer demand and manufacturing still dealing with headwinds from slower global growth and supply chain constraints.

What to expect

Looking ahead, business expectations showed signs of softening across both the services and manufacturing sectors, as February saw a broad-based decline in optimism compared to the previous month. The outlook for the German economy remains mixed, with services firms more positive about the near-term prospects, while manufacturers continue to grapple with lower order volumes, higher costs, and geopolitical uncertainty. The moderation in business expectations suggests that while some sectors of the economy are on a path to recovery, overall sentiment remains cautious, reflecting the broader challenges Germany faces as it navigates an uncertain global economic environment.