Germany's private sector activity stabilised in January, with the flash composite PMI rising to 50.1, a seven-month high, indicating a return to slight growth after six months of contraction. The improvement was led by services, with the services PMI at 52.5, the fastest expansion in six months and 1.5 points above the consensus, while manufacturing remained in contraction at 44.1, despite an eight-month high.

The economy benefited from ongoing work on backlogged orders, but demand remained subdued, as new business fell for both goods and services. Manufacturing faced persistent challenges from economic uncertainty, strong international competition, and cautious spending by customers. However, export demand showed signs of stabilisation, with the slowest decline in eight months.

Inflationary pressures surged, driven by rising energy costs, wages, and a higher CO2 tax, leading to the sharpest increase in input costs in nearly two years. Service sector firms passed costs onto customers, while manufacturers reduced discounting, resulting in the fastest output price inflation since early 2024.

Despite challenges, business confidence improved, particularly in manufacturing, where optimism reached a three-year high, supported by hopes for market recovery and a post-election economic upturn. However, capacity cuts and modest job reductions reflect ongoing caution, leaving the RPI and RPI-P at 8 and minus 1 respectively. This means that economic activities are within the consensus estimates of the German economy.

Not an inspiring start to the year. The consensus looks for manufacturing at 42.4 in the January flash versus 42.5 in December. Services are seen at 51.0 versus 51.2 in December.

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.