MNI 5 THINGS: German Factory Orders Mark Poor Start To Q3

- Anecdotal evidence suggests improvement, but the latest data are concerning

By Jaspreet Sehmi

     LONDON (MNI) - Germany's industrial sector got off to a weak start in Q3,

factory orders data released by the German Federal Statistical Office showed. We

summarise the key takeaways in the following five points.

     Overview: Undershooting consensus projections again, factory orders slumped

by 0.9% m/m in July, leaving the y/y rate at -0.9%. Economists were expecting a

1.8% m/m July rebound, particularly following the 3.9% m/m decline in June

(revised up marginally from the originally reported -4.0%). Nevertheless,

industrial orders remain at robust levels - comfortably above both series and

recent averages.

     Downside Risks Highlighted By MNI's Analysis: In MNI's preview of the data,

we outlined how historical trends indicated strong downside risks to consensus

projections for July factory orders. The 2.7pp overestimate [median consensus

projection - actual] is far greater than the 1.0pp average July overestimate of

the last ten years. Today's data represents a sharp downside surprise.

     Sectoral Breakdown: Despite the disappointing headline result, the details

reveal some positives. While orders declined across all three sectors in June,

intermediate goods orders rose for the first time in three months (by 1.5% m/m).

Although investment and consumer goods orders continued to fall, they did so

less sharply. We do not expect the recent weakness in these categories to last

much longer, as increasingly binding capacity constraints in the German

manufacturing sector should bolster investment goods orders, while an improving

labour market, with firming wage growth, should underpin consumer goods orders.

Planned fiscal support measures will also provide some impetus.

     Protectionism Concerns Continue To Weigh On Foreign Demand: Protectionist

trade policies are clearly hurting factory activity in the Eurozone's largest

economy. While domestic orders (+2.4% m/m) recovered after falling back in June,

this was more than offset by a further slide (-3.4% m/m) in foreign orders, once

again driven primarily by weaker non-Eurozone demand. Although the Juncker-Trump

meeting in late July provided some reassurance over the outlook for EU-US trade

relations, this proved to be fleeting, as President Trump subsequently stated

the EU is "almost as bad as China, just smaller," stoking concerns that the

truce on tariffs may not hold for long.

     A Clearly Negative Start To Q3 But No Major Cause For Alarm ... Yet: All in

all, today's data undoubtedly increases concern over Germany's economic outlook.

While recent survey indicators have painted an improving picture, this hasn't

yet translated into the hard data. German factory orders have declined for six

out of seven months so far this year, leaving the cumulative contraction in

orders from end-2017 levels at a relatively hefty 8.1%. Moreover, the downside

risks hovering over the outlook are substantial, including a significant rise in

global protectionism, a hard Brexit, an uptick in Eurozone sovereign risk and

further emerging market turbulence. Nevertheless, we expect the situation will

most likely brighten as Q3 unfolds, particularly given reassuring indications in

recent surveys. However, if orders were to fall again in August, our sanguine

view of Germany's economic prospects in H2 will most certainly be re-evaluated.

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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