Underlying data showed a convergence in performance between the two monitored sub-sectors, the report said, with the decline in manufacturing output easing, while the services sector posted its steepest drop for five months.

The HCOB German Flash Composite Purchasing Managers' Index (PMI), compiled by S&P Global, fell for the seventh consecutive month to 47.1 in January from December's 47.4, below the 47.8 forecast by economists.

A reading below the 50 level points to a contraction in business activity.

The composite PMI index tracks the services and manufacturing sectors that together account for more than two-thirds of the German economy.

"Germany has faced a sluggish start to the new year," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

The manufacturing PMI rose to 45.4 from 43.3 in December, above analysts' expectations of 43.7, but still in contraction territory.

Red Sea re-routings are having an impact on supply chains of the manufacturing sector as evidenced by the strong fall in the delivery times sub-index, de la Rubia said.

Due to the inverted relationship of this sub-index with the manufacturing index, the manufacturing PMI rose above forecasts.

Despite the challenges in the Red Sea, the ongoing dip in input costs, albeit with a softer trajectory, hint that transport expenses may not wield overwhelming influence yet over the aggregate unit costs of the myriad consumer goods traversing this route, de la Rubia said.

"In contrast to the manufacturing realm, inflation remains a pressing issue in the service sector," de la Rubia said.

Business activity in the services sector fell to a 5-month low of 47.6 in January from 49.3 in December, below analysts' forecast of 49.5.

"Services activity has not only declined for the fourth consecutive month but has also accelerated in its downturn," de la Rubia said.

The survey showed continued broad-based weakness in demand but with limited spillover to the labour market.