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Germany’s Services Sector Nears Recovery in July

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Germany’s services sector showed signs of stabilising in July as business activity contracted at a much slower pace and demand began to recover. The HCOB Germany Services Purchasing Managers’ Index (PMI) rose to 49.8 from 48.6 in June, its highest reading in recent months and just below the 50-point mark that separates contraction from growth.

The survey showed new business increased for the first time in five months, signalling improving demand, while employment declined at the slowest pace since job cuts began earlier this year. Export orders continued to fall but at the weakest rate in five months, suggesting external demand is also stabilising.

Despite the improvement, rising input costs and higher prices charged by businesses highlighted persistent inflationary pressures. Analysts warned that uncertainty surrounding the Iran war, volatile energy prices, and supply chain disruptions continue to pose risks, although Germany’s broader economy returned to growth in July as stronger manufacturing activity lifted the composite output index above the expansion threshold.

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Euro Zone Business Activity Rebounds in July

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Business activity across the euro zone accelerated to an eight-month high in July, driven by a recovery in the services sector and continued strength in manufacturing. The S&P Global Euro Zone Composite PMI rose to 52.0 from 50.0 in June, moving back into expansion territory for the first time since March, while the Services PMI climbed to a five-month high of 51.7.

The improvement was broad-based, with Germany returning to growth and stronger performances recorded in Italy and Spain. France remained the only major economy still in contraction, although at a slower pace. New orders increased at their fastest rate since November, employment stabilised after six months of declines, and business confidence improved despite ongoing geopolitical uncertainty.

Analysts said the conflict in the Middle East, particularly the Iran war, continues to cloud the economic outlook. While inflation in input and output costs eased, euro zone inflation edged up to 2.9% in July, reinforcing expectations that the European Central Bank could raise interest rates again in September, potentially weighing on consumer spending and business demand.

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Euro Zone Factory Output Hits 4½-Year High Despite Weak Demand

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Factory output across the euro zone grew at its fastest pace in nearly four and a half years in July, according to the latest S&P Global Manufacturing PMI survey. The headline manufacturing PMI rose to 51.9 from 51.4 in June, while the output index climbed to its highest level since March 2022, signalling continued expansion in the region’s manufacturing sector.

Despite the strong production figures, demand remained weak as new orders increased only slightly and export orders declined in several major economies, including France, Spain, Italy and Austria. Economists said manufacturers are relying heavily on clearing existing order backlogs rather than benefiting from fresh business, raising concerns about the sustainability of the recovery.

Manufacturers also continued to reduce jobs as they remained cautious about future demand. While input cost inflation eased and factory gate price increases slowed, supply chain disruptions linked to the Middle East conflict continued to affect the sector. Business confidence improved modestly but remained below its long-term average, reflecting ongoing uncertainty across the euro zone economy.

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German Inflation Rises in Key States Ahead of National Data

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Inflation increased across four major German states in July, according to preliminary figures, signalling that the country’s national inflation rate is also likely to rise. Bavaria, North Rhine-Westphalia, Baden-Wuerttemberg and Lower Saxony all reported higher inflation compared with June, reflecting continued price pressures.

The German government expects inflation to average 2.7% this year and 2.8% in 2027, citing higher energy and raw material costs linked to the conflict involving Iran. Economists surveyed by Reuters also expect Germany’s harmonised national inflation rate to climb to 2.8% in July, up from 2.4% the previous month.

The latest figures come ahead of the euro zone’s inflation data, which is also expected to show a slight increase. The European Central Bank recently kept interest rates unchanged but indicated that further monetary tightening remains possible if inflationary pressures, particularly from rising energy prices, continue.

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German Economy Shows Resilience in Second Quarter

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Germany’s economy likely recorded modest growth in the second quarter of 2026 despite challenges from the Middle East conflict, according to the Bundesbank. The central bank said strong industrial activity, steady exports, and resilient consumer spending helped offset the impact of higher energy and commodity prices.

The Bundesbank noted that Germany’s industrial sector benefited from robust foreign demand, while consumers continued spending despite rising energy costs and reduced purchasing power. Temporary factors, including supply shortages affecting some Asian competitors and early purchasing by customers anticipating future disruptions, also supported economic activity.

Looking ahead, the Bundesbank said economic pressures could ease if the conflict in the Middle East does not escalate further, though it warned that the war will likely continue to weigh on growth and inflation. The bank currently forecasts Germany’s economy to expand by 0.5% in 2026, with growth expected to improve to 0.8% next year.

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ECB Sees Inflation Returning to 2% Within a Year

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The European Central Bank (ECB) expects inflation in the eurozone to return to its 2% target within the next year, according to ECB Chief Economist Philip Lane. Speaking after the central bank kept interest rates unchanged, Lane described the current inflationary pressures as a “medium-sized” shock that requires a measured policy response rather than aggressive action.

Lane said the ECB will continue monitoring inflation closely, particularly the impact of rising energy prices on wages and broader consumer prices. While the central bank has not yet seen significant second-round effects, it warned that prolonged high energy costs could increase the risk of persistent inflation.

Although the ECB did not announce any immediate rate hikes, it signalled that further monetary tightening may be needed if inflation remains elevated. Financial markets are currently expecting at least two additional interest rate increases over the coming months as the ECB works to keep inflation under control.

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Fed Chair Kevin Warsh Makes Global Debut as Inflation Takes Centre Stage

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U.S. Federal Reserve Chair Kevin Warsh made his first major international appearance at the European Central Bank’s annual forum in Sintra, Portugal, joining ECB President Christine Lagarde, Bank of England Governor Andrew Bailey and Bank of Canada Governor Tiff Macklem. The discussion focused on the shared challenge of bringing inflation under control, while also highlighting differing views among central banks on issues such as climate change and central bank independence.

Warsh, who assumed office in late May, has adopted a hawkish stance on inflation, keeping U.S. interest rates unchanged during his first policy meeting while reaffirming the Federal Reserve’s commitment to its 2% inflation target. His comments raised expectations that the Fed could consider another rate hike later this year. Unlike previous Fed leaders, Warsh has also reduced the use of forward guidance, arguing that markets should rely less on central bank signals and more on economic data.

The event also drew attention to broader policy differences between the Federal Reserve and its global counterparts. While European and Canadian central bankers continue to consider climate change as an important financial risk, Warsh has argued that the Fed should avoid expanding beyond its core mandate. The panel also came amid renewed debate over the Federal Reserve’s independence following recent legal developments involving Fed Governor Lisa Cook, although Warsh has largely avoided commenting publicly on the issue.

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France’s Private Sector Slowdown Eases in June

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France’s private sector remained in contraction during June, but the pace of decline eased significantly, according to the latest S&P Global Flash PMI survey. The Composite Output Index rose to 47.6 from 44.9 in May, indicating that business activity is still shrinking but showing signs of stabilization. Economists viewed the improvement as a positive signal after France’s first-quarter GDP was revised to reflect an economic contraction.

The manufacturing sector showed encouraging progress, with the Manufacturing PMI climbing to 50.7, returning to growth territory. Manufacturing output also improved, while the services sector remained weak but contracted at a slower rate than in previous months. The Services PMI rose to 47.4, marking its highest level in three months.

Despite the improvement, demand remained subdued as new orders declined for a seventh consecutive month and export orders continued to fall sharply. Employment levels stabilized after a significant drop in May, while business confidence improved for the first time since January. Cooling cost pressures and softer pricing trends suggested easing inflation, although uncertainties surrounding shipping routes through the Strait of Hormuz continue to pose risks to the outlook.

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German Business Activity Falls to 18-Month Low as Services Sector Weakens

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Germany’s private sector activity contracted at its fastest pace in 18 months during June, according to the latest S&P Global survey. The Composite Flash Purchasing Managers’ Index (PMI) dropped to 48.0 from 48.8 in May, falling short of market expectations and remaining below the 50-point mark that separates growth from contraction.

The decline was driven mainly by the services sector, where the PMI fell to 46.8, its lowest level since November 2022. Business activity and new orders in the sector weakened further, while overall new business across the economy declined for a fourth consecutive month, marking the sharpest fall since December 2024.

Despite the slowdown, the survey highlighted easing inflationary pressures. Input costs rose at the slowest pace in four months, while output price inflation softened. However, business confidence for the next 12 months weakened slightly and remained below long-term averages, raising concerns that Germany’s economy may have slipped back into contraction during the second quarter.

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German Carmakers Face Mounting Pressure Amid Global Auto Industry Shift

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German automakers are losing momentum as global rivals gain ground, according to a new EY analysis. While major automotive groups worldwide posted a 2% increase in first-quarter revenue, German manufacturers recorded a 4% decline, reflecting growing challenges in key international markets.

Industry experts point to a combination of factors behind the downturn, including trade tariffs, geopolitical tensions, weakening demand in the United States and China, and the rapid pace of technological change. German carmakers are also grappling with high software development costs, excess production capacity, and a slower-than-expected transition to electric vehicles.

The outlook remains challenging as rising fuel prices and inflation, fueled in part by geopolitical uncertainty, threaten consumer demand across Europe. EY warned that the sector’s structural transformation is far from over, with 2026 likely to remain a difficult year for Germany’s automotive industry.

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