German Private Sector Rebounds Amidst Pre-Election Optimism

German private-sector output exceeded expectations in February, signaling an easing of the manufacturing recession ahead of Sunday's federal election.

Strong PMI Data

The S&P Global Composite Purchasing Managers' Index (PMI) for Germany rose to 51 in February from 50.5 in January. This reading remains above the 50 threshold indicating expansion and beat analysts' forecasts of 50.8.

Economic Recovery

"The economy appears to be regaining momentum, at least for the first two months of the year," said Cyrus de la Rubia, economist at Hamburg Commercial Bank. "The outlook will depend heavily on the ability of the newly elected government to foster stability and implement bold measures."

Market Reaction

The euro initially weakened following the release of the PMI data but stabilized, trading 0.2% lower against the US dollar. Money markets now anticipate approximately 80 basis points of European Central Bank interest rate cuts this year, up from 74 basis points on Thursday.

Outlook for Germany's Economy

Despite the recent uptick, Germany's economic prospects remain subdued. After two consecutive years of decline, the weak growth forecast for 2025 faces challenges from potential US trade tariffs, which could exacerbate the ongoing manufacturing slump.

Political Implications

The upcoming election presents an opportunity for change, with conservative candidate Friedrich Merz pledging reduced taxes and deregulation. Positive expectations for business-friendly policies boosted investor confidence in February, marking a two-year high.

Challenges Ahead

Overhauling Germany's debt brake, which restricts government borrowing, will be a crucial issue for the next government. Trade levies from the United States and structural weaknesses, such as the reliance on Russian energy, excessive regulation, and a skilled labor shortage, pose additional threats.

Manufacturing Improvement

The improvement in German manufacturing this month is attributed to a slowdown in the decline of new orders, including those from outside the country. However, de la Rubia cautions that "it is too early to celebrate" due to the ongoing risk of US tariffs.

Broader Economic Trends

France's composite PMI, released on Friday, fell to its lowest level since 2023, reflecting political turmoil. Data expected later today is anticipated to indicate ongoing private-sector growth in the eurozone, the UK, and the US.

Importance of PMIs

PMIs are closely monitored by markets because they provide early insights into economic trends and turning points. They measure the breadth of changes in output rather than depth, which can sometimes make it difficult to directly translate them into quarterly GDP.