Germany’s service sector faced another contraction in June 2025, as evidenced by the final services PMI standing at 49.7, just slightly above the preliminary 49.4. This final reading compares to a prior figure of 47.1, indicating a minor recovery. The composite PMI remained consistent at 50.4, up from the previous 48.5.

Job creation showed a slight increase, with declines in new work and backlogs slowing. Despite these improvements, the service sector continues to grapple with sluggish demand and rising costs. Companies were able to raise sales prices in June, maintaining stability in price structures.

Employment Trends in Germany

Employment within the sector saw an upturn, as more people were hired compared to May. Some firms are preparing to expand capacity, with future activity expectations picking up. However, it suggests a possible decline in labour productivity, as more workers may be needed to maintain current activity levels.

Expectations for economic growth in Germany are optimistic, with projections indicating a possible 1.6% growth next year. This forecast is supported by the German government’s economic stimulus initiatives, which are anticipated to benefit multiple sectors, including services.

Given what we’ve observed, the picture becomes a little clearer but still not without tensions. The services sector in Germany, which had stumbled through prior months, managed to edge closer to stabilisation, though not convincingly. A final PMI reading just under the neutral 50 line tells us that activity continued to recede, albeit less harshly than before. At the same time, the composite reading nudging above 50 suggests a cautious balance between growing and shrinking sectors—sort of a fragile neutrality.

What stands out is that hiring edged higher, and that tells us firms believe something better might be around the corner. Not a surge, not a turnaround as such, but improvement slow enough that they’re adding staff before the work justifies it fully. When that’s the case, it often hints less at confidence and more at preparation in the face of stretched operating capacity. Sometimes it’s easier to put people in place early than risk scrambling when business finally does come through.

Price Stability and Market Conditions

Now, despite order books still being weaker than usual, companies have managed to lift their output prices. That only really works if others are doing the same or if the broader pricing environment makes it acceptable—so we may be at a point where cost pressures are no longer damaging margins as drastically. The slower pace of decline in backlogs also matters here. It tells us the work isn’t disappearing altogether anymore. It’s just—flat.

For us, the combination of rising employment and weak output points to something that needs monitoring. If more workers are needed just to keep output stable, then productivity is likely softening. That can become a drag unless demand rises fast enough to compensate. And given that both new work and backlogs have stopped falling sharply, but not turned up yet, efficiency per head is something we can’t afford to ignore.

Looking ahead, we factor in the 1.6% growth projection for next year as plausible but not assured. It leans heavily on public policy to drive momentum, particularly through targeted support and sectoral easing. Fiscal pushes can certainly help, but whether they flow through to service providers in time depends on timing and filter-down effects.

What matters in the next few weeks is how traction builds from here. If order inflows improve even mildly, the recent rise in headcount could be justified and productivity might bounce back. Markets will be sensitive to even faint signs of acceleration—or the opposite. We’ve seen that cost-pass-through is possible, but not without friction, and wage pressures remain live.

If we see further price stability without a hit to volumes, then there’s room for calm. But we should be alert to sudden snapbacks or surprise drags, particularly from consumer demand side or imported cost jumps. For now, it’s a period where movement exists, but conviction doesn’t yet. Let’s stay aligned to the data and let short-term volatility play out without racing ahead of it.

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