Manufacturing workforce expanded for the initial time in 2020
The German manufacturing sector is experiencing a gradual recovery after a prolonged period of contraction, as evidenced by the Manufacturing Purchasing Managers’ Index (PMI) reaching 49.2 in July 2025, just shy of the 50-point threshold that separates contraction from expansion[1]. This marks the mildest contraction since August 2022, driven by output growth—the strongest since March 2022—and a streak of expansion now lasting four months[1].
Despite the positive signs, ongoing subdued demand and cost pressures have led to further job cuts, with the pace of staff reductions accelerating in June 2025 to the fastest rate since February[1]. However, business confidence among manufacturers has strengthened, reaching its highest level since February 2022[1].
Sector-specific performance varies. The production of data processing equipment, electronic and optical products decreased slightly by 0.9% compared to the same month last year[2]. The production of motor vehicles and vehicle parts also experienced a decrease, with a 3.6% drop compared to September 2020[2]. Conversely, the production of rubber and plastic products decreased by 5.0%, while the production of chemical products increased by 1.6% compared to the same period last year[2].
Key subsectors like mechanical engineering, the production of metal products, and the production of electrical equipment all decreased by 4.5%, 4.4%, and 4.0% respectively compared to the same month last year[2]. These sectors, particularly mechanical engineering, are likely to benefit from the noted pickup in foreign demand but may be limited by ongoing job cuts and persistent labor shortages[4].
The automotive sector, which has been especially hard-hit by layoffs, continues to face significant headwinds from insolvencies and restructuring[3]. The wave of insolvencies in the first half of 2025—up 9.4% year-on-year—has contributed to significant job losses, though the breakdown does not specify automotive figures separately[3].
Labor market dynamics remain complex. Germany’s unemployment rate held steady at 6.3% in June 2025, the highest since September 2020[2]. This suggests that while there are layoffs in manufacturing, other sectors may also be affected, and the labor market remains under pressure overall. Despite the layoffs, a significant portion of manufacturing firms, including those in metals and engineering, continue to report shortages of skilled labor, highlighting a structural mismatch in the labor market[4].
The outlook for the manufacturing sector is cautiously optimistic. The recovery remains fragile, with ongoing job cuts and persistent skilled labor shortages indicating that the sector is not yet on a solid growth trajectory[1][4]. The automotive industry, in particular, faces significant headwinds from insolvencies and restructuring[3]. The labor market challenges—simultaneous job cuts and skills shortages—reflect both cyclical and structural issues that will require targeted policy and business responses to resolve.
[1] Source: S&P Global [2] Source: Destatis [3] Source: German Insolvency Register [4] Source: IHS Markit
The other industries, apart from manufacturing, might also be affected by the ongoing job cuts, as the labor market remains under pressure overall. The recovery in the manufacturing sector, while gradual, is still facing challenges in the finance aspect, as ongoing cost pressures and labor shortages continue to impact businesses.
