Germany's service sector entered 2025 on a strong note, with business activity growing at its fastest rate in six months. The German services PMI rose to 52.5 in January (from 51.2 in December), in line with the consensus and signalling expansion, while the composite PMI climbed to 50.5, marking an eight-month high and 0.4 points above the consensus expectations.

Despite this positive start, demand remained fragile, with new business inflows continuing to decline, albeit at a slower pace. Client uncertainty and weaker public sector projects constrained growth, and foreign demand weakened further, posting its steepest drop in almost a year. However, firms managed to sustain activity by relying on backlogged work, which declined for the ninth consecutive month. Encouragingly, employment saw a modest increase, reversing a downward trend from the latter half of 2024. Yet, businesses faced heightened cost pressures, driven by rising wages, increased fuel prices, and a higher CO2 tax. This led to the strongest services price inflation in 11 months, as firms sought to offset expenses.

Looking ahead, business confidence surged to its highest since May 2024, with optimism tied to post-election economic recovery, lower interest rates, and strategic marketing efforts. However, sustained growth will depend on demand recovery and cost stability. The latest update lifts the German RPI to minus 9 and the RPI-P to 6, meaning that economic activities are in line with market expectations of the German economy.

For the composite, no change is the call from the flash at 50.1. For services, no change from 52.5.

The Composite Purchasing Managers' Index (PMI) provides an estimate of private sector output for the preceding month by combining information obtained from surveys of around 1,000 manufacturing and service sector companies. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) output versus the previous month and the closer to 100 (zero) the faster is output growing (contracting). The report also contains the final estimate of the services PMI. The data are provided by S&P Global.

The Purchasing Managers Index (PMI) survey has developed an outstanding reputation for providing the most up-to-date possible indication of what is really happening in the private sector economy by tracking variables such as sales, employment, inventories and prices. The indices are widely used by businesses, governments and economic analysts in financial institutions to help better understand business conditions and guide corporate and investment strategy. In particular, central banks in many countries (including the European Central Bank) use the data to help make interest rate decisions. PMI surveys are the first indicators of economic conditions published each month and are therefore available well ahead of comparable data produced by government bodies.