Germany’s final manufacturing PMI for February reached 46.5, an increase from the preliminary reading of 46.1 and the previous 45.0, marking a 25-month high. The output index rose to 48.9, indicating a nine-month high, but employment in the sector is experiencing a sharp decline.
Incoming orders have decreased again but at a slower rate than since April 2022. Signs of improvement in order backlog and a weakening of production declines over the last two months have been noted, with some growth in intermediate goods and near stability in capital goods.
Concerns Over Sustainability
Concerns remain about the sustainability of the upward trend in global industrial activity. Job cuts have sharply increased since mid-2023 as companies have been reducing their workforce despite stabilization signals in production.
Demand remains weak, evidenced by shortened supplier delivery times in February, suggesting excess production and transport capacity. Both finished goods and inputs continue to see inventory reductions.
The outlook ahead is positive but tempered compared to the start of the year. A new government and their economic plans, along with the need for significant investment to modernise public infrastructure, are essential for sustainable improvements in Germany.
That increase to 46.5 is the highest Germany’s manufacturing PMI has been in just over two years. While that is encouraging, it is still below the 50.0 threshold, meaning contraction continues, albeit at a slower pace. The rise in output to 48.9 further suggests that production is no longer declining as sharply. However, the steep drop in employment raises concerns about whether this recovery is stable or driven mostly by temporary factors.
A slower reduction in incoming orders hints at potential stabilisation, but since order books are still shrinking, demand remains weak. The improvement in intermediate goods and near stability in capital goods give reasons for cautious optimism, though they do not yet indicate a broad-based rebound. The backlog of work not deteriorating as fast as before is a positive sign, suggesting that companies may be seeing better prospects ahead.
Impact Of Workforce Reductions
Job reductions, however, bring a different picture. Businesses have been trimming their workforce in large numbers since mid-2023. The persistence of these cuts, despite moderation in production declines, suggests that firms are still bracing for weaker conditions rather than preparing for growth. This tension between improving production figures and deteriorating employment numbers complicates the near-term outlook.
Delivery times shortening in February supports the argument that demand remains soft. When suppliers are able to deliver products more quickly, it often signals that there is excess capacity in the system rather than strong consumer and business demand. Paired with the ongoing decline in inventories for both finished goods and raw materials, this suggests that manufacturers are still cautious about restocking. If they were expecting a sustained recovery, inventory rebuilding would typically begin.
The road ahead depends on more than just the manufacturing sector itself. A new government brings the potential for policy shifts, particularly in terms of investment in infrastructure and economic reform. Any efforts aimed at modernising public facilities and industries could provide longer-term benefits and stimulate activity across multiple sectors. However, without a broader increase in demand, these measures alone will struggle to create momentum.
