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(Bloomberg) — German private-sector activity shrank for a second month, raising the risk that Europe’s largest economy is succumbing to the knock-on effects of the Iran war.
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S&P Global’s Composite Purchasing Managers’ Index edged up to 48.6 in May from 48.4 the previous month, though remained below the 50 threshold separating expansion from contraction. Analysts had expected a slight increase.
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With demand sagging and inflation elevated, both the manufacturing and services sectors shrank. While the latter improved more than anticipated, it remained the bigger drag.
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“The German economy is on course to contract in the second quarter,” Phil Smith, an economist at S&P Global Market Intelligence, said Thursday in a statement. “In manufacturing, the boost that we saw from efforts to build stocks and get ahead of price increases and supply shortages appears to be fizzling out.”
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While Germany’s economy delivered a surprisingly strong start to 2026, growth is under threat, with the government already having halved its 2026 forecast to 0.5%. France is suffering more than others, with its PMI reading plunging to the lowest level in more than five years.
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Higher interest rates are likely to present another headwind for the region, with the European Central Bank mulling a hike next month. Policymakers in Frankfurt may “have to do something” in June as the energy shock from Iran proves persistent, Bundesbank President Joachim Nagel told Bloomberg Television this week. Inflation reached 3% in April.
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“Although input cost inflation has continued accelerating, slower rises in both manufacturing and services output prices point to businesses shouldering a greater proportion of the burden,” Smith said. “This suggests some containment of inflationary pressures, but it also hints at an increased squeeze on company margins.”
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PMIs are closely watched by markets as they arrive early in the month and are good at revealing trends and turning points in an economy. A measure of breadth of changes in output rather than depth, business surveys can sometimes be difficult to map directly to quarterly GDP.
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Euro-zone data will arrive at 10 a.m. CET.
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—With assistance from Harumi Ichikura, Joel Rinneby, Mark Evans and Alexander Weber.
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