Germany’s service sector experienced a contraction for the second consecutive month in May, as revealed by the HCOB Germany Services Purchasing Managers’ Index. The index, compiled by S&P Global, rose slightly to 48.1 from 46.9 in April, yet remained below the 50.0 breakeven point, indicating a contraction.

Impact of Energy Costs

The ongoing conflict in the Middle East has led to increased energy costs, which have significantly impacted demand for services in Germany. Phil Smith, economics associate director at S&P Global Market Intelligence, noted that the squeeze on spending power due to these costs and heightened uncertainty continues to stifle demand.

Despite the challenges, there is a glimmer of hope as the rates of decline in overall business activity and new work have eased, suggesting that any downturn in the second quarter might be modest. However, work backlogs have decreased for the third month in a row, resulting in further reductions in staffing levels. Employment in the sector fell for the fifth consecutive month, although the pace of job cuts has slowed.

Inflation and Business Expectations

Input cost inflation remained close to April’s three-year high, driven by energy, transport, and wage costs. Meanwhile, output price inflation eased slightly from April’s 26-month high as some firms faced stronger competition and client resistance to higher prices.

Business expectations for the next 12 months have improved, rebounding from April’s low to reach their highest level since February. This optimism may reflect hopes for a resolution to the Middle East conflict and potential economic support through government policies. However, confidence has not yet returned to pre-war levels.

The final S&P Global Germany composite PMI, which includes both services and manufacturing, rose to 48.8 in May from 48.4 in April, indicating a slight improvement but still below the breakeven point.

Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.