German industrial orders drop on weaker domestic demand

German industrial orders fell more than expected in August on weaker domestic demand, data showed on Monday, adding to signs that a manufacturing slump is pushing Europe’s largest economy into recession.

Contracts for ‘Made in Germany’ goods fell 0.6 per cent from the previous month, with demand for capital goods down 1.6 per cent, the Economy Ministry said. The overall fall compared with a Reuters consensus forecast for a drop of 0.3 per cent.

“The German economy is in the midst of a recession. Today’s data make that clear again,” said Thomas Gitzel, economist at VP Bank Group.

The economy shrank by 0.1 per cent in the second quarter, and recent data have pointed to continued weakness in manufacturing in the third quarter. Most economists define a recession as two straight quarters of contraction.

“The German government will probably come under growing pressure to give up its strict budget policy,” added Gitzel.

The government has so far stuck to its balanced-budget policy, despite pressure from economists and other governments to spend more to boost flagging demand.

Finance Minister Olaf Scholz said last week that Germany would be able to cope with an economic crisis but added that he did not expect a downturn to be as bad as it was in 2008/2009. “The weakness in demand in industry continues,” the Economy Ministry said in a statement accompanying Monday’s data. “The industrial sector remains subdued for the time being.”

Germany’s export-reliant manufacturers are suffering from a slowing world economy and business uncertainty linked to a trade dispute between the United States and China as well as Britain’s planned but delayed exit from the European Union.

Monday’s weaker-than-expected data added to the sense of gloom around the German manufacturing sector.

A survey released last Tuesday showed the manufacturing recession deepened in September, with factories recording their weakest performance since the world financial crisis a decade ago.

Last Wednesday, leading economic institutes slashed their growth forecasts for the economy for this year and next, blaming weaker global demand for manufacturing goods and increased business uncertainty linked to trade disputes.

The institutes also called on Chancellor Angela Merkel’s coalition government to ditch its budget policy of incurring no new debt if the growth outlook deteriorates. It has so far refused to do so.

Merkel’s government has managed to raise public spending without incurring new debt since 2014, thanks to an unusually long growth cycle, record-high employment, buoyant tax revenues and the European Central Bank’s bond-buying plan.

But with the economy slowing and tax revenues waning, the fiscal room to counter a recession is getting smaller. At the same time, Germany’s borrowing costs have turned into premiums, which means investors are actually willing to pay the state a bonus for being able to lend it billions of euros.

Meanwhile the weaker demand from abroad drove a bigger-than-expected drop in German industrial orders in July, suggesting that struggling manufacturers could tip Europe’s biggest economy into a recession in the third quarter.

Germany’s export-reliant economy is suffering from slower global growth and business uncertainty caused by US President Donald Trump’s ‘America First’ trade policies and Britain’s planned, but delayed, exit from the European Union.

Contracts for ‘Made in Germany’ goods fell 2.7 per cent from the previous month in July, data showed, driven by a big drop in bookings from non-eurozone countries, the economy ministry said. That undershot a Reuters consensus forecast for a 1.5 per cent drop. “The misery in manufacturing continues. The decline in new orders significantly increases the risk of a recession for the German economy,” VP Bank analyst Thomas Gitzel said.

Germany’s gross domestic product contracted by 0.1 per cent quarter-on-quarter in the second quarter on weaker exports, with the decrease in foreign sales mainly driven by Britain and below average demand from China.

“The danger is great that negative growth will also be recorded in the third quarter,” Gitzel added.

The economy ministry said new orders in manufacturing had a weak start to the third quarter and that the outlook for the sector was also looking grim.

“In light of still unresolved international trade conflicts and muted business expectations in manufacturing, there are still no signs of a fundamental improvement in the industrial sector in the coming months,” the ministry added.

Orders from non-euro zone countries plunged nearly 7 per cent on the month while demand from other eurozone countries and domestic bookings rose slightly, the data showed.

Without the distorting effects of bulk orders, industrial orders rose 0.5 per cent on the month in July, the ministry added.

Reuters