Manufacturing recession sees German economy contract further

Germany’s economy continued to contract in December, marking the sixth consecutive month of declining business activity, according to the latest HCOB flash purchasing managers’ index (PMI).

Despite a slight improvement in services, a deepening recession in manufacturing and weak demand across sectors kept the composite PMI output Index firmly in negative territory at 47.8, up from 47.2 in November.

The services sector showed modest resilience, returning to growth with an activity index of 51.0, its highest level in two months, after dipping below the 50.0 threshold in November.

However, the gains in services were outweighed by the manufacturing sector's sharper decline.

The manufacturing PMI fell to 42.5, missing market expectations of 43.8, while manufacturing output hit a three-month low of 41.7.

Persistent drops in new orders, particularly from international markets, contributed to the sector’s struggles.

“It looks like the German services sector is setting up for a better-than-expected Christmas season,” said Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

“The manufacturing sector did not exactly deliver any holiday cheer.”

“What is really catching the eye is the trend in prices in the services sector.”

Underlying demand remained weak, with new business inflows showing their steepest decline since September.

Both sectors experienced reductions in backlogs of work, enabling businesses to fulfill orders faster than they arrived.

Manufacturers responded by cutting jobs for the seventh straight month, although the pace of layoffs slowed slightly.

Employment in services also edged lower, reflecting subdued business confidence amid concerns over political uncertainty, economic stagnation, and challenges in the automotive industry.

Inflationary pressures resurfaced in December, as input costs and output prices rose at their fastest rates in eight and 10 months, respectively.

While the manufacturing sector saw a slower decline in purchase prices, services experienced a sharp increase in operating expenses, driving up average prices charged.

The outlook for 2025 remained cautious.

Although business confidence improved slightly from September's low, it remained below historical norms, with manufacturers particularly pessimistic.

Firms cited hesitancy among clients, strong competition, and a lack of foreign demand as ongoing challenges.

“Input price inflation shot up significantly in December, hitting the highest since April,” Dr de la Rubia added.

“It is still a bit unclear whether the services sector is in a slow-motion downturn or on the brink of stabilization leading to recovery.

“We are inclined to expect a recovery in the German services sector, buoyed by improved sentiment over future activity and the upcoming snap elections in February, which should bring more political clarity.”

Reporting by Josh White for Sharecast.com.