MNI 5 THINGS: German Factory Orders Rebound In August

- Non-EZ foreign demand grows at strongest pace in over four years

By Jaspreet Sehmi

     LONDON (MNI) - Germany's industrial sector has put in a lacklustre

performance so far this year, but data released this morning by the Federal

Statistical Office showed a bounce in August factory orders. We summarise the

key takeaways in the following five points.

     Overview: Factory orders in Germany, Europe's largest economy, rebounded

strongly in August after two consecutive monthly declines. Orders rose by 2.0%

m/m following unrevised drops of 0.9% in July and 3.9% in June. Monthly declines

in all but two months since the start of the year mean that orders are still

down 4.6% year-to-date and 2.1% on the year. Nevertheless, they remain at robust

levels - comfortably above both series and recent averages, following a stellar

performance in 2017.

     Sectoral Breakdown: The sectoral details show an exact reversal of the

pattern in July. Intermediate goods orders, which were the only source of

strength in July, fell back in August, albeit only by 0.1% m/m. Investment and

consumer goods more than made up for their July declines, rising by 3.4% and

2.1% respectively. As MNI highlighted in its July review of the data, we

expected these categories to rebound. We pointed out that increasingly binding

capacity constraints in Germany's manufacturing sector are positive for

investment goods demand, while an improving labour market, with firming wage

growth, should continue to support consumer goods orders in the coming quarters.

Planned fiscal support measures will also provide some impetus to both

categories. On the external front, despite numerous headwinds, demand for

Germany's products is supported by strong competitiveness both in terms of price

and quality.

     Non-EZ Foreign Demand Surges In August: While domestic orders fell back by

2.9% m/m after a 2.4% rise in July, foreign orders rose by an impressive 5.8%

m/m (after -3.4% in July). The breakdown shows that this was powered entirely by

non-EZ demand. While EZ orders fell back by 2.2%, those coming from outside the

currency bloc surged by 11.1% m/m - the strongest monthly gain since July 2014.

     Outlook For Foreign Demand Mixed: Whether August's sharp rise in demand

from outside the Eurozone signals a more sustained rebound remains to be seen,

as protectionist trade policies and emerging market weakness remain dampening

factors. Nevertheless, August's outturn, along with anecdotal evidence from the

Ifo survey and Bundesbank monthly reports, offers cause for optimism and

suggests that fears of a sharp and protracted slowdown are overdone.

     Weaker Euro Bolstering Foreign Demand: While the relief provided by the

US-EU trade ceasefire is likely one factor behind the recent recovery in

extra-EZ demand, as it reduces uncertainty over tariffs and supply-chain

disruption, it has also been bolstered by a weaker euro, which has made goods

priced in the single currency more competitive on the global market. After

hitting a recent high of EUR1=USD1.25 in February, the currency pair has since

exhibited a broadly downward trend to trade at around EUR1=USD1.15 currently.

Tensions over Italy's budget and Brexit uncertainties pose some near-term

downside risks, but we expect the euro to strengthen over the medium-term,

bolstered by the ECB's gradual withdrawal of monetary stimulus. As such, the

exchange rate boost to export orders is likely to moderate over the coming year.

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

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