Germany's economy remained in contraction as 2024 closed, with the flash December composite PMI at 47.8. This marked a slight improvement from November's final 47.2 and was 0.6 points above the consensus forecast but still well below the 50-expansion threshold. The services sector offered a glimmer of stability, climbing to 51.0, indicating slight growth after earlier declines. However, manufacturing continued to struggle, with its PMI at a three-month low of 42.5, dragged down by weak domestic and international demand.

New business inflows fell at the sharpest rate since September, particularly in manufacturing, where hesitancy and competition dampened client interest. Backlogs of work also decreased signalling ongoing demand weakness. Employment declined for the seventh consecutive month, with manufacturers cutting jobs more substantially than service providers.

Even so, inflationary pressures mounted, with input costs and output prices rising at their fastest rates in several months. This was driven by service sector expenses, despite easing costs in manufacturing. Business sentiment improved slightly but remained historically low due to political uncertainties, a sluggish economy, and challenges in the automotive sector. Today's update puts the German RPI at minus 11 and the RPI-P at minus 13. This means that economic activity in general is running slightly behind market estimates.

Forecasters see no change in the contracting trend: the composite flash is expected unchanged at 47.2. Manufacturing flash is seen at a dismal 43.1, pretty flat from 43.0 in November. Services is expected at 49.0 versus 49.3.

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.