German service sector growth accelerates to a four-month high in February

Investing.com – According to the latest HCOB Germany Services PMI data released on Wednesday, the German services sector showed stronger growth in February, with business activity expanding at the fastest pace in four months.

The HCOB Germany Services Business Activity Index rose from 52.4 in January to 53.5 in February, reaching the highest reading since October last year. The HCOB Germany Composite PMI Output Index also increased from 52.1 last month to 53.2, hitting a four-month high.

The improvement in the services sector was driven by stronger demand, with companies reporting new clients and large projects. New business inflows grew for the fifth consecutive month, with the expansion rate reaching a three-month high.

Export activity was particularly strong, with new orders from overseas customers increasing at the fastest pace since May 2023. This marked the first time since February 2022 that both manufacturing and services sectors recorded export sales growth simultaneously.

German service providers saw a slight increase in unfinished business in February, marking only the third rise in backlogs in two and a half years.

Despite the positive business indicators, employment in the services sector declined for the second consecutive month. The rate of workforce reduction accelerated from January, reaching the fastest pace since June 2020.

Companies cited layoffs, non-replacement of departing employees, and higher employee costs as reasons for staffing reductions.

Operating expenses surged in February, driven by wage pressures, energy costs, transportation expenses, and higher supplier prices. Input price inflation slowed slightly from the 12-month high in January but remained above historical trend levels.

Service providers raised output prices to offset higher costs, although the rate of price increases slowed compared to the previous month.

Business confidence remained high, although slightly below the 20-month high in January. Optimism about growth prospects remained above the long-term average.

Firms attributed their positive outlook to increased new business, expectations of economic improvement, and the adoption of artificial intelligence in business processes.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said: “This was a fairly strong growth in the services sector in February. The outlook for continued expansion is good, as new business growth outperformed last month, supported by large orders and a significant increase in new overseas orders.”

De la Rubia noted that the composite PMI suggests that economic growth in the first quarter could remain at the 0.3% level of the previous quarter.

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