German Economy Slows in June as Businesses Encounter Weakening Demand Conditions

The German economy experienced a marked loss of momentum during the latter part of the second quarter, according to the latest ‘flash’ PMI survey conducted by Hamburg Commercial Bank. Weakening demand conditions led to a significant slowdown in business activity growth, while company expectations hit a six-month low and job creation rates also dropped. Inflation pressures eased in June, with manufacturers recording the first decline in output prices in over two and a half years. Although service sector costs and selling prices continued to increase, driven partly by higher wages and rising interest rates, inflation rates showed signs of deceleration.

The HCOB Flash Germany Composite PMI Output Index exhibited a substantial decline in June, falling from May’s 53.9 to 50.8. Despite remaining above the 50.0 thresholds indicating growth, this reading pointed to a sharp deceleration in the expansion rate, reaching a four-month low. The decline resulted from both a slower increase in service sector business activity (index down from 57.2 in May to 54.1) and a deepening downturn in manufacturing output (index dropping from 47.4 to 44.2).

Businesses reported deteriorating demand conditions towards the end of the second quarter, as evidenced by a second consecutive monthly decrease in total inflows of new work. The decline rate accelerated to its fastest pace since December of the previous year, with weakness primarily concentrated in the manufacturing sector. Service sector new business continued to grow in June, albeit at a modest pace — the weakest since February.

Germany’s private sector saw backlogs of work deplete at an accelerated rate in June, with firms increasingly relying on the outstanding business to maintain activity levels. Employment continued to rise in June, but job creation reached a three-month low and became more uneven across the monitored sectors. Manufacturing employment growth nearly stalled, while service sector staffing levels experienced a further robust increase.

June’s flash survey revealed divergent trends in costs and prices between the two sectors. Manufacturing output charges fell for the first time since September 2020, while service sector costs and selling prices continued to rise steeply, although at a slower pace. This led to the slowest increases in overall input costs and output prices in 31 and 28 months, respectively.

Lastly, the latest data indicated a further weakening of business confidence regarding the year-ahead outlook. Manufacturing firms expressed concerns about a sustained downturn in new orders and a broader economic slowdown, leading to increased pessimism. While sentiment among services firms remained positive overall, it reached its lowest point in six months.