The HCOB German Flash Composite Purchasing Managers' Index (PMI), compiled by S&P Global, fell to 44.7 from July's 48.5, hitting its lowest since May 2020 and confounding analysts' expectations for a reading of 48.3.

The indicator was below the 50 level denoting growth in activity for the second consecutive month.

The composite PMI index tracks the services and manufacturing sectors, which together account for more than two-thirds of Germany's economy. A deepening downturn in manufacturing output was accompanied by a renewed contraction in services activity.

"Any hope that the service sector might rescue the German economy has evaporated," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. "Instead, the service sector is about to join the recession in manufacturing, which looks to have started in the second quarter."

Business activity in the services sector contracted for the first time in eight months. The sector reading fell to 47.3 from 52.3, marking a nine-month low.

The manufacturing PMI rose to 39.1 in August from 38.8 in July but remained deeply in contraction territory, the survey showed.

Businesses remained pessimistic about the outlook as rising interest rates, customer uncertainty and high inflation continued to weigh on demand for goods and services, the survey showed.

There was an increase in inflationary pressures, driven by accelerated cost and price increases in the service sector.

"Services companies seem to feel surprisingly bold jacking up prices at an even quicker rate," de la Rubia said.