The latest flash PMI data from S&P Global, released on the 21st, reveals a marked acceleration in Germany's manufacturing expansion during August. The manufacturing PMI climbed from July's 52.2 to 54.1, marking its strongest reading in 51 months and comfortably exceeding the market consensus of approximately 52.0. The output sub-index surged further to 56.7, representing the fastest growth pace in roughly four and a half years. However, the services sector continues to lose momentum, with its PMI sliding to 48.5, which pulled the composite output index down to 51.0 from 51.3, though it still remains in expansionary territory. This industrial upturn in Germany is also providing a significant lift to the broader eurozone manufacturing picture.
Where the manufacturing rebound stands
Germany's manufacturing sector has now remained in expansion for seven consecutive months, with August's growth rate being the most robust since May 2022. New orders, output, and export sales have all accelerated, with production rising at its quickest clip in four and a half years. Survey respondents point to inventory rebuilding, increased defense spending, and data center-related investments as key pillars underpinning demand. Phil Smith, Economics Associate Director at S&P Global Market Intelligence, noted that the manufacturing recovery has regained momentum in August after showing signs of stalling during the second quarter, with improving export sales playing a pivotal role in driving the production rebound.
At the eurozone level, the flash manufacturing PMI rose to 52.8, also a 51-month high, with the output index reaching a 54-month peak. Germany stands out as the primary industrial engine behind this strength. France's manufacturing sector has returned to expansion, but its services component remains weak, keeping the composite index below the crucial 50 threshold.
Services stress and slowing composite growth
The German services PMI fell from 49.8 to 48.5, hitting a three-month low and marking the fifth consecutive month of contraction, with the latest decline being the sharpest of this downturn. This services weakness has partially offset the manufacturing gains, causing the composite output index to dip slightly while still holding above the expansion mark. On the employment front, overall headcount remained unchanged after 26 straight months of declines. The services sector saw modest job creation, while the pace of manufacturing job cuts slowed to its most gradual level in over a year.
Business expectations have climbed to their highest point since before the Middle East conflict erupted, and now sit marginally above the long-term average. Input cost pressures, while still elevated relative to historical norms, have eased somewhat compared to July, with output price inflation cooling to a five-month low. Supply chain conditions remain a watchpoint, as disruptions stemming from the Middle East situation persist and some companies continue to build precautionary inventories. The eurozone survey also highlighted that new orders grew at their fastest pace in 40 months, while export orders expanded for the first time in four and a half years. Overall price pressures have moderated, though energy costs remain a key concern for businesses.
Growth outlook and policy implications
Germany's economy is displaying a clear sectoral divergence: the industrial side is accelerating on the back of defense, data center investments, and foreign demand, while the services sector continues to contract. Composite activity remains in expansion but with limited momentum. The eurozone composite PMI rose to 52.1, a nine-month high, which S&P Global estimates aligns with roughly 0.3% quarter-on-quarter growth in the third quarter. For the European Central Bank, the strengthening manufacturing momentum, stabilizing employment, and sustained expansion in activity paint a relatively firmer growth backdrop. While selling price inflation has moderated, the overall price level remains elevated. Going forward, the key watchpoints will be whether the services sector can stabilize and whether energy and supply chain disruptions resurface to push costs higher. The euro showed limited volatility following the data release, with the currency also influenced by dollar movements and bond market dynamics. Final figures are scheduled for release in early September.