Germany's Business Activity Contracts 1.5% in May, Led by Service Sector Decline

Germany's business activity experienced its first contraction this year in May, primarily due to a sharp decline in the service sector, which overshadowed modest growth in manufacturing. The composite Purchasing Managers' Index (PMI) for Germany fell to 48.6 in May from 50.1 in April, dropping below the 50.0 threshold that separates expansion from contraction. The services PMI dropped to 47.2 from 49.0 in April, marking a 30-month low. This decline was attributed to weak demand and customer uncertainty, representing the largest decrease since September 2024. In contrast, the manufacturing PMI edged up to 48.8 from 48.4 in April.

The downturn in the service sector was particularly notable, with the PMI hitting its lowest point since November 2022. This decline was driven by a significant reduction in new orders and a slowdown in business activity growth. The report highlighted that the decrease in demand was the most pronounced since the beginning of the year, with companies citing economic uncertainty and reduced consumer spending as key factors.

Despite the overall contraction, there were some positive signs in the manufacturing sector. The slight increase in the manufacturing PMI suggested that the sector was showing resilience, although it remained below the expansion threshold. Experts noted that the manufacturing sector could benefit from increased defense spending and clearer infrastructure plans, which might provide additional momentum. Additionally, the decline in energy prices was expected to reduce input costs, offering some relief to manufacturers.

Looking ahead, the outlook for the German economy remains uncertain. While the manufacturing sector shows signs of stability, the service sector's decline poses a significant challenge. Economic experts have warned that without a reversal in the service sector's fortunes, the overall economic outlook could remain bleak. The contraction in May underscores the need for targeted policies to support both the service and manufacturing sectors, ensuring that Germany can navigate the current economic headwinds and achieve sustainable growth.

Germany's economic experts committee released an economic forecast report on May 21, predicting zero economic growth for 2025, a significant downgrade from the previous expectation of 0.4% growth. This indicates that Germany's economy may experience a third consecutive year without growth. The report highlighted that the current economic environment is characterized by a noticeable slowdown, with factors such as approval procedures continuing to hinder overall economic growth. Structural changes are accelerating and are expected to impact sectors and regions that have previously maintained strong development.

The report identified two major factors that will influence Germany's economy in the near future: U.S. tariff policies and Germany's fiscal stimulus measures. The committee's chair, Monika Schnitzer, noted that U.S. tariff policies are adding to the burden on Germany's already weakened export sector. If tariffs rise sharply and unpredictably, the decline in exports could worsen. The report also mentioned that Germany's recent fiscal stimulus measures are expected to boost infrastructure investment and government consumption starting from 2026. With disposable income growth accelerating, private consumption is anticipated to recover. Based on these positive factors, the report predicts that Germany's economic growth rate will rebound to 1% in 2026.

In 2023 and 2024, Germany's economy contracted by 0.3% and 0.2% respectively, marking the first time since 2003 that the economy has experienced consecutive years of decline. The economic forecast report underscores the challenges facing Germany's economy and the need for effective policies to stimulate growth and address the underlying issues affecting both the service and manufacturing sectors.