Germany's economy rebounds as services sector drives growth
According to the latest PMI data, economic activity in Germany increased in February, reaching its highest level in nine months. The economy appears to be returning to a growth path, at least in the first two months of the year, writes Dr. Cyrus de la Rubia from Hamburg Commercial Bank.
In February 2025, economic activity in the German private sector experienced growth for the second consecutive month, with the pace of growth slightly accelerating. The HCOB Flash Germany Composite PMI Output Index rose to 51.0 from 50.5 in January, marking the best result in nine months.
The growth was driven by the services sector, where business activity increased for the third month, although the pace of expansion slightly weakened, reaching 52.2 compared to 52.5 in the previous month. Meanwhile, the impact of declining industrial production on the overall result lessened, as the manufacturing sector recorded the slowest decline since May of the previous year, with the index at 48.5, according to the latest S&P report.
The demand for goods and services showed signs of stabilization. The total number of new orders declined only slightly, marking the mildest drop in a nine-month series of reductions. Export orders experienced a similar trend, decreasing at the slowest pace since May 2024.
Slower declines in new orders were evident in the services and industrial sectors. However, the lack of new projects contributed to further reductions in work backlogs, with this decline accelerating, particularly in the services sector, where the reduction was apparent and faster than before.
Employment and costs in the German economy
The number of employees in the German economy slightly decreased. The services sector recorded a slight worker increase for the second month, but it was insufficient to offset deeper job cuts in the industry. As a result, the overall employment level decreased somewhat faster than in January.
Higher labor costs continued to drive strong growth in service prices in February, although the inflation rate fell to its lowest level in three months.
Expert commentary and forecasts: "The recession is easing"
Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, noted that the manufacturing sector continues to face challenges, but there are signs of improvement. He stated, "The recession has been easing for two months, and the production index is approaching the expansion threshold of 50."
He emphasized that the slowdown in the decline of new orders, including export orders, supports this trend. However, he cautioned that the sector may encounter challenges related to tariffs, which Germany may impose on EU products in the coming months.
Meanwhile, the services sector has maintained stable growth for three months, benefiting from increasing private consumption, which has prevented the industrial recession from spreading to services.
The expert highlighted the strength of the services sector in terms of prices, indicating that service firms are still raising prices at a similar pace as before, demonstrating their resilience.
The economy seems to be returning to a growth path, at least in the first two months of the year, the analyst claims.
According to the GDP Nowcast model, which includes PMI data and other indicators, the industry's impact on growth is weakening, and service development compensates for those losses. However, as the economist noted, future economic sentiment will depend on the new government's ability to ensure stability and implement bold measures.
