Germany's private sector slipped back into contraction at the start of the third quarter, primarily due to a deteriorating manufacturing performance, according to the latest expectations from the PMI survey. The report's composite output index fell to 48.7 in July from 50.4 in June, indicating a modest decline in business activity. This downturn was driven by a sharper fall in manufacturing output, with the index at 42.6, marking the steepest drop in nine months.

Meanwhile, service sector growth slowed to its weakest pace since March, just below the long-run average at 52.0. Employment weakened across the board, reflecting a broad-based decrease in jobs. New business inflows also declined for the second consecutive month, with manufacturing orders experiencing the steepest contraction in three months. While the service sector saw new business rise for the fourth month, growth was modest, hindered by a decline in non-domestic demand.

On the inflation front, input cost inflation saw a modest uptick to a three-month high. Service sector operating expenses rose slightly faster, while the decline in manufacturing costs slowed for the seventh time in eight months. Despite this, overall cost inflation remained below the long-term average.

Overall, the German private sector's return to contraction, driven by manufacturing declines and weakened employment, signals ongoing economic challenges despite modest service sector growth and slightly improved business sentiment.

Manufacturing in June remained deeply depressed at 43.5 and only limited improvement is expected for July where the consensus is 44.0. Services, which in June slowed more than a point to a lower-than-expected 53.1, are seen rising to 53.5. Consensus for July's composite is 50.8 following June's 50.4.

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.