Services Lead the Revival in Germany’s Private Sector While Manufacturing Remains Under Pressure

Germany’s private‑sector economy has registered its strongest expansion in more than two and a half years as the fourth quarter of 2025 takes off—with a striking performance from the services sector soothing worries, even as the nation’s manufacturing engine remains fragile.

According to the preliminary flash composite Purchasing Managers’ Index (PMI) for Germany compiled by S&P Global and Hamburg Commercial Bank (HCOB), business activity across the services and manufacturing sectors climbed to 53.8 in October, up from 52.0 in September. The reading marks the highest level since May 2023, signalling sustained growth for the fifth straight month.

Crucially, the services PMI jumped to 54.5 from 51.5 in September—a sharp acceleration in business activity in the services sector, delivering the strongest pace of growth in over two years. By contrast, manufacturing remains in contraction territory: the manufacturing PMI edged up to 49.6 in October, marginally better than 49.5 in September, but still below the 50.0 threshold that separates expansion from contraction.

What’s driving the rebound
The revival in Germany’s business mood is being driven by a pickup in demand for services—ranging from domestic consumption to business‑to‑business services—at a time when the industrial side remains weighed down by structural weak spots, global supply‑chain friction and subdued export momentum. New business volumes reported in October rose at their quickest pace since April 2022, primarily fuelled by renewed orders for service‑sector firms.

In manufacturing, while output has now risen for the eighth consecutive month, the improvement remains modest, and companies continue to face shrinking order books and headwinds in investment. The eight‑month run of output increases comes amid persistent uncertainty around global demand, high energy and raw‑material costs, and the challenge of transitioning production lines.

Why it matters for Q4
The strong services result gives the German economy a more reliable anchor heading into the final quarter of 2025. After two weak years — Germany’s gross domestic product shrank in both 2023 and 2024 — the private‑sector momentum offers a ray of hope for growth recovery. A healthy services sector means household consumption and business services may help offset a still‑challenged manufacturing base, allowing the broader economy to eke out a modest rebound.

From a policy perspective, stronger services growth may relieve some of the pressure on the European Central Bank (ECB) to cut rates aggressively, especially in light of inflationary pressures emerging from higher operating costs in services. It also improves the near‑term outlook for employment and investment in parts of Germany’s economy less exposed to global trade cycles.

But the caution remains
Despite the encouraging headline number, several caveats remain. The manufacturing sector’s contraction—albeit slight—serves as a reminder that Germany’s historic industrial strength is not yet fully back. Firms remain cautious: business expectations for the next 12 months have softened, reaching their weakest level since April, reflecting concerns over domestic demand, high cost burdens, geopolitical uncertainty and global competitiveness.

Employment data also paints a mixed picture. The report shows that private‑sector employment continued to decline in October, marking the 17th consecutive month of job cuts, although the pace of decline slowed. The longest stretch of employment falls since the global financial crisis still drags on.

For manufacturing firms in particular, the weak outlook persists. Some report increased job‑cuts even while output rises – raising questions about how durable the rebound will be. Meanwhile elevated input and output price inflation in services—caused by wage pressures, energy costs and supply constraints—could threaten margins and consumer demand.

Outlook: Holding pattern or turning point?
In the short term, the start of Q4 looks favourable for Germany: a strong services performance provides ballast, and the industrial sector, though weak, is stabilising. Yet unless manufacturing shifts into growth territory and employment momentum reverses, the risk remains that Germany’s recovery will remain patchy and dependent on the fortunes of services alone.

Experts at Hamburg Commercial Bank describe the data as “an unexpectedly good start to the final quarter.” But they caution that the situation remains “fragile.” The question will be whether this improvement in services translates into spill‑over to manufacturing, investment and jobs — and whether firms’ cautious outlooks evolve into sustained confidence and hiring.

Implications for businesses and investors
For businesses: service‑sector firms in Germany should feel more confident about demand and may consider scaling staffing or investment. Manufacturing firms, however, should remain cautious and focus on cost control, productivity gains and diversification of markets.

For investors: the surprisingly strong PMI could enhance confidence in Germany’s economic resilience, potentially bolstering sectors tied to consumption and services within Germany and the broader euro‑area. At the same time, those exposed to German manufacturing or export‑oriented business should weigh the continued weakness in orders and hiring.

For policymakers: While the ECB may be less pressured to ease immediately, German fiscal policymakers should recognise the uneven nature of the recovery and consider targeted support for investment, training and innovation in manufacturing to avoid a services‑only growth story.