Big-Picture Snapshot

Drivers this month

Germany’s HCOB Manufacturing PMI rose to 49.1 in January 2026, up from 47.0 in December 2025 and well above the 12-month average of 48.6. This marks the first significant improvement since the late summer of 2025, when the PMI last hovered near 50. The rebound was driven by:

• Stabilization in new orders, with the sub-index rising to 48.7 (December: 46.2).
• Improved supplier delivery times, reflecting easing supply chain pressures.
• Marginal uptick in employment, with the jobs sub-index at 50.2 (December: 49.8).

Policy pulse

The PMI’s move closer to the 50.0 threshold—signaling stabilization—comes as the European Central Bank (ECB) maintains a cautious stance. While inflation remains above target, the ECB has paused rate hikes, awaiting clearer evidence of economic recovery. The January PMI print provides tentative support for the ECB’s “wait-and-see” approach, but policymakers remain vigilant for signs of persistent weakness.

Market lens

Immediate reaction: EUR/USD rose 0.3% and DAX futures gained 0.5% in the hour following the release. The positive surprise in the PMI print was interpreted as a sign that Germany’s industrial sector may be bottoming out, prompting a modest rally in risk assets and a firmer euro.

Foundational Indicators

Drivers this month

January’s PMI rebound coincided with a stabilization in German industrial production and a modest improvement in business sentiment. Key macro indicators include:

• Industrial production (December 2025): -0.3% MoM, an improvement from -1.1% in November.
• IFO Business Climate Index (January 2026): 89.7, up from 88.2 in December.
• Unemployment rate: steady at 5.8%.

These figures suggest that the manufacturing sector’s contraction is slowing, with tentative signs of a broader economic stabilization.

Policy pulse

Germany’s fiscal stance remains mildly supportive, with the government extending targeted energy subsidies and investment incentives into early 2026. However, fiscal space is constrained by the constitutional “debt brake,” limiting large-scale stimulus. The ECB’s policy rate remains at 3.75%, with forward guidance emphasizing data dependence.

Market lens

German 2-year bund yields edged up by 4 basis points post-release, reflecting reduced recession fears. Breakeven inflation rates were steady, while the euro’s gains against the dollar were modest but notable given recent volatility.

Chart Dynamics

Drivers this month

• New orders and output sub-indices both rose by over 2 points month-on-month.
• Export demand stabilized, aided by improved conditions in key eurozone partners.
• Input cost pressures eased further, supporting margins.

Policy pulse

The PMI’s rebound reduces pressure on the ECB to accelerate rate cuts, but policymakers will watch for confirmation in hard data. Fiscal policy remains steady, with no major stimulus announcements expected in Q1 2026.

Market lens

Immediate reaction: EUR/USD rose 0.3% and DAX futures gained 0.5%. The positive print triggered a rally in cyclical stocks and a mild steepening of the German yield curve, reflecting improved growth expectations.

Forward Outlook

Scenario analysis

• Bullish (30%): PMI rises above 50.0 by March 2026, signaling renewed expansion. Industrial production and exports accelerate, supporting GDP growth above 1% annualized in H1 2026.
• Base case (55%): PMI hovers near 49–50 through Q1 2026. Manufacturing stabilizes but remains vulnerable to external shocks and weak global demand. GDP growth remains subdued, around 0.5% annualized.
• Bearish (15%): PMI slips back below 48.0 amid renewed energy price shocks or geopolitical tensions. Manufacturing contraction deepens, risking a technical recession.

Risks and opportunities

Upside risks include stronger-than-expected global demand, further easing of supply bottlenecks, and a faster recovery in China. Downside risks stem from renewed energy volatility, persistent inflation, and escalating geopolitical tensions (notably in Eastern Europe and the Middle East).

Market lens

Markets are likely to reward further PMI gains with higher equity valuations and a stronger euro. However, any reversal would quickly revive recession fears and pressure risk assets.

Closing Thoughts

Summary

Germany’s January 2026 HCOB Manufacturing PMI offers the clearest sign in months that the sector’s downturn is abating. While the index remains just below the expansion threshold, the breadth and magnitude of the rebound are encouraging. Policymakers and investors will watch closely for confirmation in February’s data, but for now, the risk of a deepening manufacturing recession has receded.