German private sector contracts for 2nd month amid Iran war fallout

German private-sector activity contracted for a second consecutive month in May, raising concerns that Europe's largest economy is being hit by the spillover effects of the Iran war.

The S&P Global Composite Purchasing Managers' Index (PMI) for Germany rose slightly to 48.6 in May, up from 48.4 in April, but remained below the 50-point threshold that separates expansion from contraction.

Analysts had expected a modest improvement in the index.

Both the manufacturing and services sectors remained in contraction territory, as weak demand and elevated inflation continued to weigh on business activity.

"The German economy is on course to contract in the second quarter," Phil Smith, an economist at S&P Global Market Intelligence, said 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," Smith added.

Germany posted a stronger-than-expected start to 2026, but growth prospects have weakened as higher energy costs, supply concerns, and inflationary pressures linked to the Iran war weigh on the economy.

The German government has already halved its 2026 growth forecast to 0.5%.

The latest figures also come as concerns grow across the euro area, with France's PMI falling to its lowest level in more than five years.

Higher borrowing costs could add further pressure on the region, as the European Central Bank weighs a possible rate hike next month. Bundesbank President Joachim Nagel said this week that policymakers may "have to do something" in June if the energy shock from Iran proves persistent.

Euro area inflation reached 3% in April.

Smith said input cost inflation in Germany continued to accelerate, but slower increases in output prices in both manufacturing and services showed that businesses were absorbing a larger share of the burden.

"This suggests some containment of inflationary pressures, but it also hints at an increased squeeze on company margins," he said.