Germany private sector activity returns to contraction

The HCOB Flash Composite PMI for Germany declined sharply to 48.6 in May 2025 from 50.1 in April, significantly missing market expectations of 50.4 and signaling a return to contraction in the private sector after four months of modest expansion. This reversal highlights growing headwinds in Europe’s largest economy amid ongoing external uncertainties and weakening domestic demand.

Germany private sector activity returns to contraction

The contraction was primarily driven by a marked deterioration in the services sector, which shrank for the second consecutive month at the fastest pace in two and a half years. The services PMI fell to 47.2 from 49.0, reflecting persistently soft demand conditions, cautious client spending, and a challenging operating environment for businesses reliant on domestic and international consumer confidence. Conversely, the manufacturing sector showed signs of resilience despite the broader slowdown. The sector contracted at a slower rate, with the PMI inching up slightly to 48.8 from 48.4, while production volumes grew for the third consecutive month. Notably, new export orders rose at the fastest pace since early 2022, suggesting that demand from abroad is helping to offset some weakness in the domestic market. This divergence between manufacturing and services underscores the uneven nature of the economic slowdown.

Employment slightly decreases

Employment levels in the private sector edged down slightly during May, with companies continuing to exercise caution amid the uncertain outlook. On the price front, inflationary pressures eased, with the rate of increase in average prices charged for goods and services falling to its lowest level since October of the previous year. Meanwhile, input cost inflation remained steady at April’s six-month low, indicating that cost pressures may be stabilizing, which could provide some relief to profit margins. Looking forward, business sentiment showed signs of improvement as companies’ expectations for the coming months rebounded somewhat, despite the current contraction. This cautious optimism may reflect hopes for easing geopolitical tensions and potential policy support, although downside risks remain amid ongoing global trade frictions and inflationary concerns.