German manufacturing downturn eases as PMI reaches 25‑month high

The February PMI report for German manufacturing indicates clear signs of recession easing, despite continued decreases in crucial areas. The production index rose to 48.9 points from 46.3 in January, marking its highest value in nine months and suggesting a much slower decline in manufacturing activity.

The main HCOB Germany Manufacturing PMI, a measure of overall business conditions, increased to 46.5 points in February from 45.0 in January. Although it is still below the 50.0-point threshold that signals recovery, it is the highest reading since January 2023. The rise in the main index was primarily driven by a more moderate decline in new orders, which experienced the smallest drop in nearly three years.

A significant factor in this improvement was the reduced negative impact of falling export sales. Like total new orders, export sales fell only slightly on a monthly basis and at one of the slowest rates since the current decline began in early 2022. Detailed data highlights an increase in foreign demand for intermediate goods.

Contrary to the improving production and order indicators, factory employment decreased sharply and at an accelerated rate, the fastest in three months. Alongside reports of not replacing departing employees and not extending temporary contracts, the surveyed companies frequently mentioned layoffs.

A slower decline in incoming new orders and significantly reduced staffing levels meant that the decline in order backlogs, observed since mid-2022, eased again in February. This marked the fourth time in the past five months that such a situation occurred. Overall, backlogs decreased only slightly, at the second slowest pace in the current series of declines.

A similar trend was seen in producers’ purchasing activity. Here, the pace of contraction remained significant as companies continued to indicate a preference for lower inventory levels of purchased materials. In February, there was another sharp decline in pre-production inventories, although the pace of depletion slowed compared to January. In contrast, inventories of finished goods declined at a slightly faster rate than in the previous month.

The February survey showed further reductions in both input costs and product prices in the German manufacturing sector. Moreover, the respective rates of decline accelerated following only moderate declines earlier in the year. The lack of inflationary pressure coincided with indications of excess production capacity in supply chains, and companies reported the most significant improvement in delivery times for purchases in six months.

The latest data suggests manufacturers are optimistic about their production prospects for the coming year. Expectations remained above the historical average, although they weakened slightly from the 35-month high reached in January, amid concerns about geopolitical tensions and tariffs.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commenting on the PMI data, stated that the recession in the German industry might conclude in the coming months. Particularly promising are the incoming orders, which decreased again but more slowly than at any point since April 2022. The same can be said for the order backlogs. The production recession has significantly weakened over the past two months.

In the intermediate goods sector, production increased again, while in another key capital goods sector, production approached stabilisation. This points to the possibility of an early overall recovery. At this stage, however, caution is advised, as it remains uncertain whether the upward trend in global industrial activity will persist.

De la Rubia also observed that the reduction in employment has recently accelerated sharply. Companies have been reducing staff month by month since mid-2023. However, with signs of production stabilisation, it is possible that firms will gradually change direction, and measures to reduce employment may end in the coming months.

There are, however, negative aspects to consider. Demand remains weak. Although there are signs of stabilisation in the order situation, the fact that supplier delivery times shortened in February is an indicator of unused production and transport capacities in the economy. The inventory cycle has not yet reversed — both finished products and purchased inputs continue to see reductions.