Weak German factory order rise dents hopes for robust recovery

Orders for German industrial goods rose by a weaker-than-expected 2.8%, indicating an initial snap back from the coronavirus shock is fading into a slower recovery.

Analysts were expecting Europe’s largest economy could recover strongly in the

third quarter from the shock of coronavirus.

The rise compared with a Reuters forecast for a 5.0% gain on the previous month, signalling a slow return to pre-crisis levels. June figures were revised up to show an increase of 28.8% from 27.9% previously reported, the Federal Statistics Office said on Friday.

Order intake in July was still 8.2% lower than in February, before lockdown measures were imposed to slow the spread of the coronavirus.

“In the coming months, we will probably see that the low-hanging fruit has been harvested, and now the economic race to catch up will lose momentum,” said Jens-Oliver Niklasch, economist at Landesbank Baden-Wuerttemberg.

“We will not see the pre-crisis levels quite as quickly as some had hoped,” he added.

The German economy contracted by a record 9.7% in the second quarter as household spending, company investment and trade all collapsed at the height of the COVID-19 pandemic.

A government stimulus package includes a temporary cut in value-added tax (VAT) from July 1 until Dec. 31, worth up to 20 billion euros ($24 billion), to give an additional push to domestic demand, which remains sluggish.

Domestic industrial orders fell by 10.2% on the month in July but orders from abroad were up 14.4%, the Statistics Office said. ING economist Carsten Brzeski said the figures showed “an enormous twist between domestic and foreign demand”.

The weak domestic demand chimed with figures published on Wednesday showing German retail sales fell unexpectedly in July, dashing hopes that household spending can drive a strong recovery in the third quarter.

Earlier this week, the chief executive of Germany’s Daimler said global demand for Mercedes-Benz cars had stabilised from a sharp drop in sales triggered by the coronavirus crisis.

“In China we saw a V-shaped recovery. That’s not the case in Europe and North America but we have rebounded from the freefall,” Chief Executive Ola Kaellenius said.

Germany’s response to the pandemic has been effective by European standards, keeping infection and death rates relatively low despite imposing restrictions that were both milder and shorter than in many other countries.

The government on Tuesday revised upwards its 2020 forecast for the economy to shrink by 5.8% this year from a previous estimate of -6.3%. But that would still represent the biggest economic slump since World War Two.

Meanwhile, German Finance Minister Olaf Scholz is working on a budget for next year that would see Berlin take on net new debt of at least 80 billion euros to fund more measures in the fight against the coronavirus pandemic, a source familiar with the matter said.

The move underlines Scholz’s determination to move Germany further away from its former image as Europe’s austerity champion and cement Berlin’s new role as the biggest spender in the euro zone’s struggle to recover from the COVID-19 pandemic.

The exact debt figure for 2021 is still subject to negotiations within Chancellor Angela Merkel’s conservative-led coalition government, but Scholz is trying to avoid net new debt exceeding 100 billion euros in 2021, the source told Reuters.

The step will require another suspension of Germany’s constitutionally enshrined debt limits after Berlin already abandoned them this year, though Scholz is determined to stick to the fiscal rules from 2022 onwards, the source added.

A finance ministry spokesman declined to comment. Aspects of the debt plans were earlier reported by  agencies.

Scholz asked parliament this year to suspend the debt brake in the constitution and allow the federal government to take on record new borrowing of some 218 billion euros.

This means that Germany’s combined net new debt for 2020 and 2021 in the coronavirus pandemic could surge above 300 billion euros.

Officials have said Germany expects its debt-to-GDP ratio to jump to around 77% in 2020 from just below 60% in 2019. The overall public sector budget deficit is seen reaching 7.25% of GDP this year after a budget surplus of 1.5% last year.

The finance ministry plans to update its tax revenue estimates next week. This will be followed by Scholz’s proposal for the federal government’s budget in 2021, which the cabinet is expected to pass on September 23  Separately, German government bonds stabilised on Friday on the back of a selloff in tech stocks and a survey showing the euro zone’s rebound from its deepest downturn on record faltered in August.

Reuters