Germany's manufacturing sector appears to be cautiously stepping out of the shadows of economic decline, with the latest manufacturing PMI climbing to a 25-month high of 46.5, 0.4 points above the consensus. While still below the 50.0 expansion threshold, the report signals a notable slowdown in contraction, suggesting that the sector is gradually stabilising rather than recovering.

A key driver of this improvement is the slower decline in new orders, particularly a reduced drag from exports. Foreign demand for intermediate goods has provided a much-needed cushion. However, this optimism is met with a stark contrast: employment is shrinking accelerated, reflecting continued cost-cutting measures, redundancies, and a lack of confidence in sustained demand.

Further underscoring the fragile nature of the recovery, manufacturers are scaling back purchasing activity and drawing down inventories rather than restocking, indicating that businesses remain hesitant about near-term demand. Deflationary pressures are mounting on the pricing front, with both input costs and output prices falling quicker, reflecting spare capacity and weaker supplier pricing power.

While manufacturers retain a modest optimism for the year ahead, concerns over geopolitical tensions and trade barriers temper enthusiasm. The latest update takes the RPI to minus 7 and the RPI-P to minus 8, meaning that economic activities are within the consensus of the German economy.

Ongoing contraction is seen in Germany’s industrial sector with the final index unrevised from 46.1 in the flash.

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.