German Business Growth Accelerates to 11-Month High on Services Rebound, PMI Shows

Germany's private sector expanded at its most rapid pace in 11 months in September, fueled by a surprise return to growth in the services industry after five months of contraction. The data suggests resilience in Europe's largest economy but also points to renewed inflationary pressures from rising energy costs.

The S&P Global Flash Germany Composite PMI Output Index, a key gauge of economic health, rose to 53.8 in September from 51.8 in August, according to the business survey. Any reading above the 50.0 mark indicates expansion in business activity.

A Divergent Picture

The September upturn was driven almost entirely by the services sector, which saw its activity index jump to 52.9 from 49.7, marking a seven-month high.

In contrast, the manufacturing sector showed signs of cooling. The headline manufacturing PMI slipped to a two-month low of 53.8 from 54.3, while the manufacturing output sub-index eased to 55.9 from 56.6.

Strengthening Demand and Labor Market

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Despite the manufacturing slowdown, underlying demand appeared robust. New orders increased for the third consecutive month and at the fastest rate since February 2022, supported by higher investment and export business. This led to a rise in backlogs of work for a second straight month, indicating growing pressure on capacity.

In response, companies accelerated hiring, with job creation reaching its fastest pace in more than three years. Employment gains remained concentrated in the services sector, while the rate of job losses in manufacturing slowed.

Inflationary Pressures Mount

A notable concern highlighted in the report was the acceleration of inflation. Input costs for businesses rose at the fastest pace in four months, with firms widely citing higher fuel and energy prices.

Companies passed these higher costs on to customers, as average prices charged for goods and services increased at the fastest rate since May. "The flash data pointed to the strongest rise in business activity for almost a year, with the service sector finally rejoining manufacturing in growth territory," said Phil Smith, economics associate director at S&P Global Market Intelligence. Smith also noted that "rising inflows of new work were starting to put pressure on business capacity," which was strengthening labor-market conditions.