Germany’s construction PMI for July rose to 46.3 from 44.8, the highest since February 2023, suggesting a slight easing in the construction downturn. This improvement is partly due to increased commercial building work, though challenges remain as companies reduce workforce numbers and purchasing activity because of a lack of new incoming work.
While the PMI has improved by approximately four points since the beginning of the year, the construction sector is still in recession compared to manufacturing and services trends. Input prices continue to rise, and business expectations for the next year remain under the expansion threshold.
Commercial Construction And Residential Trends
Commercial construction saw its first expansion since March 2022, with residential construction contracting at a slower rate. In contrast, civil engineering activity fell in July after three months of growth, having seen robust performance in June.
The outlook for the construction sector is bleak, with low confidence among firms. New orders are declining due to high prices and customer hesitance, which negatively impacts residential construction. Employment has decreased for 40 consecutive months, and input prices have risen for five months, though at a rate below the long-term average.
Given today’s date of August 6, 2025, the slight improvement in Germany’s construction PMI is more of a trap than a trend. We see the rise to 46.3 as a minor correction within a deep recession, not the start of a recovery. Traders should consider this a chance to build short positions, perhaps by selling out-of-the-money call options on construction giants like Hochtief, capitalizing on the still-bleak overall outlook.
The split between improving commercial work and weak residential building suggests a pairs trading opportunity. We would look at going long on companies with heavy exposure to commercial and infrastructure projects while simultaneously shorting firms focused on residential housing. Heidelberg Materials’ recent Q2 2025 earnings already reflected this divergence, showing resilience in commercial segments but continued pain in housing.
Broader Economic Consequences
This weak data from a core sector reinforces our bearish stance on the broader German economy. With Germany’s latest inflation figures still hovering around 2.5%, the European Central Bank has little room to cut rates to stimulate growth. This should keep a lid on the DAX index and add downward pressure to the EUR/USD exchange rate in the coming weeks.
Looking forward, the decline in new orders and the 40th consecutive month of falling employment are the most critical takeaways for us. This confirms there is no real demand to fuel a sustained recovery, a sentiment we saw echoed during the false starts of 2023 and 2024. Therefore, any strength in the sector should be seen as a temporary bounce and an opportunity to buy put options on German real estate ETFs.
