Business activity closed out the year on a much weaker footing than expected. At 46.7, the flash composite output index was 1.3 points below the market consensus and down from November's 47.8. This was the sixth successive month in which the headline index has been short of the 50-expansion threshold.

The headline decline was attributable to a faster rate of contraction in services, where the flash sector PMI dropped from November's final 49.6 to 48.4, and a steeper drop in manufacturing output (43.4 after 44.2). The flash manufacturing PMI (43.1 after 42.6) actually moved up to a 7-month high but remained deep in recession territory.

New business continued to weaken in both sectors and backlogs were down again too. As a result, headcount was cut by the most since August 2020 with losses posted in both sectors. Even so, looking ahead aggregate business expectations improved for a third straight month, notably in manufacturing which was positive for the first time since April.

Inflation developments were more robust. Overall input costs posted their steepest increase in seven months while output price inflation, having hit a two-and-a-half year low in October and November, moved back above its long-run average.

In sum, the December data increase the likelihood of recession having arrived in Germany. However, the ECB will note the pick-up in both cost and output price inflation which warns that financial markets may be overly aggressive in their interest rate cut expectations for 2024. Today's update reduces the German RPI to minus 14 and the RPI-P to minus 16. Both measures show economic activity lagging market expectations.

Manufacturing has been in long and deep contraction, at 42.6 in November; only modest improvement is expected for December where the consensus is 43.3. Services, at 49.6 in November, are seen at 49.9. Consensus for December's composite is 48.0 following November's 47.8.

The flash Composite Purchasing Managers' Index (PMI) provides an early estimate of current private sector business activity by combining information obtained from surveys of around 1,000 manufacturing and service sector companies. The flash data are released around ten days ahead of the final report and are typically based upon around 85 percent of the full survey sample. Results covering a range of variables including manufacturing output, employment, new orders, backlogs and prices are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The report also contains flash estimates of the manufacturing and services PMIs. The data are produced by S&P Global.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' manufacturing indexes, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.