Germany's manufacturing sector PMI dropped to a three-month low of 42.5 in December, in line with the consensus. The sharp falls in both output and new orders, particularly in the intermediate goods sector, highlighted the persistent weakness in demand. Production volumes contracted at their second-steepest rate in over a year, with new orders declining rapidly due to market uncertainty and excess customer stock levels.

Domestic demand emerged as the primary challenge, though export orders also fell, albeit at a slower pace. Reduced order inflows allowed firms to deplete backlogs and prompted continued reductions in employment and inventory levels. While staff cuts persisted for the 18th consecutive month, the rate of decline eased to the weakest since August, reflecting cautious workforce adjustments.

The supply side showed improvement, with input lead times reducing and material availability improving. Despite a further decrease in input and factory gate prices, the rate of decline in costs and charges moderated, suggesting stabilising supplier dynamics. However, subdued growth expectations for 2025, driven by political uncertainties and challenges in the construction and automotive sectors, underline the fragile outlook. The latest data leaves the German RPI at 10 and the RPI-P at 3. This means that economic activity in general is within the consensus of the German economy.

Forecasters uniformly look for no revision in the final report from the flash at 42.5.

The Manufacturing Purchasing Managers' Index (PMI) provides an estimate of manufacturing business activity for the preceding month by using information obtained from a representative sector survey incorporating around 500 companies. Results 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 data are released 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 ISM manufacturing index in the U.S. and the Markit PMIs elsewhere, 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.

The S&P Global PMI manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. And its sub-indexes provide a picture of orders, output, employment and prices.