German business activity returns to growth in June

The HCOB Flash Germany Composite PMI Output Index rose to 50.4 in June 2025, up from 48.5 in May and exceeding market expectations of 49.0. This reading signals a modest but notable return to growth in the eurozone’s largest economy, marking the first expansion in six months.

The improvement was primarily driven by a strong performance in the manufacturing sector, where output surged to 52.6—its highest level since March 2022—extending a four-month streak of expansion. This rebound reflects rising factory orders and greater production volumes, aided by improved supply chain conditions and stabilizing global demand.

While the services sector remained in contraction territory, the pace of decline moderated, with activity only slightly below the neutral mark. The softer downturn suggests that the sector may be approaching a turning point, though elevated cost pressures and cautious consumer sentiment are still weighing on performance.

Encouragingly, new orders across the private sector rose for the first time in over a year, signaling a potential turnaround in domestic and external demand. This uptick in client activity bodes well for the second half of the year, particularly if geopolitical tensions ease and eurozone-wide confidence strengthens. However, the labor market showed signs of strain, as firms continued to reduce headcounts—likely a reflection of ongoing cost-cutting measures and subdued expectations for near-term profitability.

Business optimism, while still positive, dipped slightly from the previous month, with firms citing lingering concerns about global trade uncertainties, volatile energy markets, and the trajectory of monetary policy. On the inflation front, output prices rose at a faster pace compared to May, though the rate of increase remained close to long-term averages.

Input cost inflation, however, eased to its lowest level since October 2023, providing some cost-side relief for businesses. The moderation in input prices, combined with stable selling price trends, may offer the European Central Bank more room to maneuver as it weighs the balance between supporting growth and containing inflation.

Overall, the June PMI data paints a cautiously optimistic picture for Germany’s economic recovery, with manufacturing emerging as a key driver of momentum even as services and labor market dynamics remain mixed.