Germany’s manufacturing sector has entered 2026 with cautious signs of improvement, offering a measure of relief after a prolonged period of pressure. Data from the HCOB Germany Manufacturing PMI for January suggests that while the sector remains in contraction, some key indicators are beginning to stabilise.
The headline PMI rose to 49.1 in January, up from 47 in December. Although this is still below the 50 mark that separates growth from contraction, it is the highest reading in three months and signals that the pace of decline is slowing. For an industry that has been under strain for nearly four years, even small movements carry significance.
One of the most encouraging developments was the return of output growth. After shrinking in December, production volumes edged back into positive territory in January. New orders also recorded a slight increase, ending a three-month slide. This points to early signs that demand may be finding a floor, even if a full recovery remains distant.
Export demand, however, continues to weigh on the sector. New export orders remained in contraction, though at a slower rate than in recent months. Manufacturers also worked through existing backlogs, which led to a faster decline in outstanding business. This reflects a market that is still cautious, with companies focusing on efficiency rather than expansion.
Employment trends underline this caution. Manufacturers continued to reduce staffing levels, cutting jobs through restructuring, fewer contract workers, and unfilled vacancies. Inventories fell sharply across the board, with finished goods stocks dropping at their fastest pace since August 2021. Many firms appear to be deliberately running lean, reducing exposure in case demand weakens again.
Cost pressures, meanwhile, have intensified. Input prices rose at the fastest pace since December 2022, driven by higher raw material and energy costs. Despite this, manufacturers struggled to raise selling prices. Factory gate prices declined for the third consecutive month as competition remained intense and buyers resisted price increases.
Looking ahead, sentiment among manufacturers has improved. Business confidence rose to a seven-month high, supported by expectations of new product launches, innovation, and targeted investment. While firms remain realistic about near-term challenges, there is growing belief that conditions could improve later in the year.
Economists caution against reading too much into a single month’s data, but the direction of travel matters. Output growth, rising optimism, and stabilising orders suggest the sector may be moving away from its weakest phase. Companies that have streamlined operations and invested in productivity during the downturn could be better positioned if demand strengthens.
For now, Germany’s manufacturing sector is not out of trouble. But January’s figures indicate that the long period of decline may be easing, setting the stage for a gradual and uneven recovery rather than a sharp rebound.
