Germany’s service sector faced a downturn in June 2025. The final services PMI was 49.7, slightly better than the preliminary reading of 49.4, and an improvement from 47.1 earlier. The composite PMI held steady at 50.4, up from 48.5. Job creation increased slightly, but new work and backlogs still declined. Companies are grappling with slow demand and rising costs. In June, they managed to raise sales prices while keeping price structures stable. Employment levels rose as more people were hired compared to May. Some firms are planning to expand capacity, with hopeful expectations for future activity. However, this could mean that labour productivity might decline since more workers may be needed just to keep up with current activities. Optimism about Germany’s economic growth is on the rise, with a forecast of 1.6% growth next year, supported by government stimulus initiatives expected to help various sectors, including services. Overall, while there are signs of improvement, tensions still exist. The service sector seems closer to stability but is not quite there yet. A PMI reading just below 50 indicates activity is still declining, though not as sharply. The composite reading above 50 suggests a delicate balance between growth and contraction. Notably, hiring has increased, showing that firms might anticipate better times ahead. However, this cautious optimism may indicate preparation rather than outright confidence. It’s often easier to hire in anticipation of future work than to scramble for staff later when business picks up. Despite weaker order books, companies have managed to raise their output prices. This works only if others do the same, which could mean cost pressures are no longer significantly harming profit margins. A slower decline in backlogs shows that work isn’t disappearing; it has simply plateaued. The combination of rising employment and weak output raises questions. If more workers are needed just to maintain current output levels, it could lead to lower productivity. This could be a problem unless demand increases quickly to balance it out. With new work and backlogs stabilizing at lower levels, we need to keep an eye on efficiency. Looking ahead, the 1.6% growth prediction for next year could materialize but isn’t guaranteed. It relies heavily on effective public policy, particularly through targeted support. While fiscal measures can help, their impact on service providers depends on timing and how effectively the benefits trickle down. In the coming weeks, we need to watch for any signs of improvement in order inflows. If this happens, the recent increase in hiring might be justified, and productivity could rebound. Markets are sensitive to even minor changes, whether positive or negative. We’ve observed that passing on costs is possible but can be challenging, with ongoing wage pressures. If we experience more price stability without affecting volumes, it could be a calming sign. However, we should remain vigilant for any sudden changes, particularly from consumer demand or rising import costs. For now, we are in a phase of movement but lack clear conviction. Let’s stay focused on the data and allow short-term fluctuations to unfold without rushing ahead.

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