By Maria Martinez
BERLIN (Reuters) -Business activity in Germany fell in May, marking the first contraction this year, as a sharp downturn in the service sector overshadowed some improvement in manufacturing, a survey showed on Thursday.
The HCOB German flash composite Purchasing Managers’ Index, compiled by S&P Global, dropped to 48.6 in May from 50.1, below the 50.0 threshold that separates growth from contraction.
Analysts polled by Reuters had forecast a reading of 50.4.
The downturn was primarily driven by the service sector, with its index falling to 47.2 from 49.0 in April, reaching a 30-month low.
This decline was driven by weakening demand and customer uncertainty, marking the steepest drop since September 2024, the report said.
“It is more of a positive story for industry than a negative story for the service sector,” Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, told Reuters.
Industry is still benefiting from activity being pulled forward to beat the impending tariffs and a cyclical recovery after several years of recession, he said.
The decline in central bank interest rates is also helping the capital-intensive industrial sector rather than the service sector, which is less debt-intensive, de la Rubia added.
Manufacturing sentiment continued to decline, albeit at a slower pace. The headline manufacturing index rose to 48.8 from 48.4 in April.
“Looking ahead, increased defence spending and a more defined infrastructure package could give the sector an extra push,” said de la Rubia. “Plus, falling input costs, which are driven by cheaper energy, should offer manufacturers some breathing room.”
He noted that there is a risk that the service sector will enter a downturn, but falling inflation should further strengthen purchasing power in the coming months, from which service providers should benefit more.
Business expectations improved from April’s recent low, but employment nevertheless fell slightly on the month.
(Reporting by Maria Martinez; Editing by Toby Chopra)
