Germany's manufacturing sector gained fresh momentum in August, according to preliminary survey data, with the flash Manufacturing PMI climbing to 54.1 from 52.2 in July and coming in above the 52.0 reading expected by economists.

The latest flash release from S&P Global showed:

• Manufacturing PMI: 54.1, against expectations of 52.0 and a prior reading of 52.2
• Services PMI: 48.5, versus 50.1 expected and a prior reading of 49.8
• Composite PMI: 51.0, compared with 51.3 expected and a prior reading of 51.3

While manufacturing moved further into expansionary territory, the services index remained below the 50 mark that separates growth from contraction, and the composite output index edged slightly lower. The factory gains extend a turnaround in a sector that had spent much of the period since 2022 in decline, weighed down by weak demand and the energy-price shock that followed Russia's invasion of Ukraine.

Purchasing Managers' Index (PMI) readings are diffusion indices compiled from monthly surveys of companies in the manufacturing and service sectors. A reading above 50 indicates an increase in activity compared with the previous month, while a reading below 50 indicates a contraction. Flash estimates are published ahead of final figures and are based on the bulk of the month's survey responses. Germany is the largest economy in the euro area, and the composite PMI combines the manufacturing and services sectors to provide an overall view of private-sector activity. Because they are among the timeliest reads on business conditions each month, PMIs are closely watched by analysts and central bankers, including at the European Central Bank, as an early input into assessing economic conditions across the currency bloc; flash data for the wider euro area are published on the same day.

Commenting on the data, Phil Smith, Economics Associate Director at S&P Global Market Intelligence, said:

"The recovery in the manufacturing sector has regained momentum, after it showed signs of stalling in the second quarter. Output, new orders and export sales have all risen at their quickest rates since early-2022, which likely reflects some catch-up from the more subdued picture we saw a few months back at the peak of the uncertainty and spike in oil prices associated with the Middle East war, as well as the influence of increased defence spending filtering through. It still remains to be seen if this pace of growth can be sustained, not least in light of ongoing supply risks, but a notable strengthening of manufacturers' sentiment towards future output suggests that the upturn has legs.

"Although the service sector continues to act as a drag on growth, a second successive slight uptick in new business and a renewed rise in employment in the sector suggest that things could start to get better soon on the activity front. A slower rate of services output price inflation also bodes well for demand in the coming months."

The increased defence spending Smith points to has a concrete policy backdrop: at their June 2025 summit, NATO members agreed to a target of 5% of GDP in annual core and defence-related spending by 2035, and Germany has since moved to exempt higher defence outlays from its constitutional debt brake, easing a longstanding fiscal constraint on such spending.

Final August PMI figures are due in early September, with the durability of the factory upturn — including the supply risks Smith flagged, and whether the pickup in services new business and employment carries through to activity — set to show up in the coming months' surveys.

Source: ForexLive