German Business Activity Shrinks Again as Services Drag on Europe's Largest Economy

Germany's private sector contracted again in June, the third consecutive month of decline and the steepest drop in that run, according to the closely followed flash purchasing managers survey compiled by HCOB and S&P Global. The composite index, which tracks activity across both industry and services, slipped to 48.0 from 48.5 the month before, sitting below the level of 50 that separates growth from contraction and undershooting the reading of about 49.6 that economists had expected. For Europe's largest economy, still trying to shake off a long industrial slump, another month of shrinking output is an unwelcome sign.

The details show an economy pulling in two directions. Manufacturing steadied at 50.0, precisely on the line between expansion and contraction and the more encouraging half of the report. The damage came from services, where the index sank to 46.8, its weakest in 18 months and the sharpest fall since late 2022. Because the service sector is usually the more resilient part of a modern economy, its accelerating decline, with both new orders and activity dropping faster, is the part that will worry policymakers most.

The survey matters because it is a forward looking gauge, drawn from the managers who buy the goods and services that keep companies running, and readings under 50 point to output that is actively shrinking rather than merely slowing. Three straight months in that territory suggest the rebound many had penciled in for this year is stalling. German industry has spent the past several years wrestling with soft export demand, elevated energy costs, and fierce competition from abroad, and a faltering services sector removes one of the few cushions the economy had left.

There was one bright spot in the numbers. Inflationary pressures continued to ease, with the costs that businesses pay for inputs rising at their slowest pace since just before the outbreak of the war in the Middle East. That cooling gives the European Central Bank more room to consider the interest rate cuts that could eventually revive demand. For now, though, the report describes an economy losing momentum in the middle of the year, one that will need either cheaper borrowing or a pickup in foreign appetite to turn the corner.