Why you shouldn't get too excited about the 1.8% increase in German factory orders

Wednesday, July 6, 2011

German factory orders increased rather sharply in May, 1.8% in volumes and on a seasonally adjusted basis. The impetus to industrial orders growth on the month was primarily German factories buying capital goods, +2.4%.

Factory orders do lead economic activity, so German domestic demand is likely still plugging away. But that's as good as it gets - the report also reveals further evidence of a global economic slowdown.

While domestic orders surged 11.3% in May, orders from abroad (EMU countries plus extra-EMU countries) fell 5.8%. The three-month moving average of the index for German factory orders from abroad is now falling at the margin.

Of the new factory orders coming from outside Germany's borders, extra Euro-area orders fell a sharp -6.1% over the month (demand from the UK, the US, and presumably Asia). Factory orders from other Euro-area countries fell 5.4% in May.

The three month moving averages are stable to down for orders stemming from all sources except for within Germany. The implication is that Germany, which drove 50% of GDP growth in Q1 but holds just a 30% share, will further drive Euro-area economic activity into Q2 via robust investment spending. However, this report is consistent with a crystal clear slowdown in global demand.

This is not good for the outlook for Spain nor Italy. Note, too, that Italy's PMI is now in sub-50, i.e., contracting, territory across both the service and manufacturing industries.

Rebecca Wilder


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