Germany suffered the steepest decline in business activity for more than three years this month, according to survey data published Wednesday, stoking fears that Europe's biggest economy is falling back into recession.
An initial reading of the country's Purchasing Managers' Index (PMI), which tracks activity in the manufacturing and service sectors, tumbled to 44.7 in August, from 48.5 in July. That's the lowest reading since May 2020, when the country began gradually lifting stringent pandemic restrictions. A reading below 50 indicates a contraction.
The survey highlighted a "deepening downturn in manufacturing," with output falling for the fourth consecutive month. Activity in services fell for the first time in eight months.
"Any hope that the service sector might rescue the German economy has evaporated. Instead, the service sector is about to join the recession in manufacturing," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which publishes the survey of German companies in partnership with S&P Global.
The figures add to evidence that Germany's economy is sputtering again after it emerged from a winter recession in the second quarter by the narrowest of margins. Data earlier this month revealed a steeper-than-expected slowdown in industrial production in June — driven by a sharp contraction in the country's vast automotive sector.
Germany's economic malaise is spilling over to the other 19 countries that use the euro, with the wider region also at risk of slipping into recession after eking out growth in the second quarter.
An initial PMI reading for the euro area fell to 47 in August, the lowest since November 2020, according to a separate survey published Wednesday by Hamburg Commercial Bank and S&P Global.
"The downward pressure on the economy of the eurozone in August stems mainly from the German service sector," said De la Rubia.
Both surveys showed a worrying uptick in inflation in services because of rising wages, which could make the European Central Bank more reluctant to pause interest rate hikes when it meets next month.
Again, the picture is worse in Germany than the rest of Europe, with "stagflation" — referring to a toxic mix of high inflation and slow growth — taking hold.
"Activity has started to shrink while prices have shot up again, even picking up pace," De la Rubia said. "When inflation cannot be tamed in the eurozone's biggest economy, this is bad news for the ECB."
Andrew Kenningham, chief Europe economist at Capital Economics, said the euro area economy would probably head into recession in the second half of the year, "with Germany likely to be the worst performer."