German Factory Orders Unexpectedly Fall Amid Economic Risks

The Economic Engine of Europe Slows Down
  • August orders drop 1.8% versus estimate for 0.5% increase
  • Euro region a bright spot with 2.5% increase in demand

German factory orders unexpectedly fell in August in a sign that Europe’s largest economy is vulnerable to weaker growth in China and other emerging markets.

Orders, adjusted for seasonal swings and inflation, dropped 1.8 percent after decreasing a revised 2.2 percent in July, data from the Economy Ministry in Berlin showed on Tuesday. The typically volatile number compares with a median estimate of a 0.5 percent increase in a Bloomberg survey. Orders rose 1.9 percent from a year earlier.

A China-led slowdown in emerging markets that threatens Germany’s export-oriented economy is exacerbated by an emissions scandal at Volkswagen AG that could affect as many as 11 million cars globally. Still, business confidence unexpectedly increased in September as the economy benefited from strengthening domestic demand on the back of record employment, rising wages and low inflation.

“While order data in August were overall disappointing, it’s too early to fall into a panic about the economy because orders from within the country and the currency union amid all the volatility still point upward,” said Stefan Kipar, an economist at Bayerische Landesbank in Munich. “However, high uncertainty about China and the cooling of the Chinese economy has left its mark.”

Excluding big-ticket items, orders dropped 2.1 percent in August, the Economy Ministry said in a statement. Domestic factory orders declined 2.6 percent as demand for investment goods slumped. The drop in orders was exaggerated by school holidays, it said. A bright spot was the rest of the euro area, where demand for capital goods jumped.

The euro was little changed after the report and traded at $1.1205 at 10:57 a.m. Frankfurt time. The benchmark DAX Index was up 0.2 percent at 9,838.

Company investment in the euro area will expand at a moderate pace in the coming quarters, according to updated forecasts by Germany’s Ifo institute, France’s national statistics office Insee and Italy’s statistics agency Istat. The institutes predict economic growth of 0.5 percent this quarter and next as private consumption benefits from an improving labor market. While the latest developments in emerging markets bear risks for the 19-nation euro region, a pronounced slowdown of economic activity is “highly unlikely,” they said in a statement published on Tuesday.

Waning Chinese industrial demand has prompted Henkel AG to announce the removal of 1,200 jobs at its adhesives unit as it adapts capacity. While the brunt of the layoffs will be borne in Asia, 250 jobs will be cut in Europe and 100 in Germany.

August factory orders don’t yet reflect the impact of VW’s cheating on U.S. emissions tests revealed last month. Chairman-designate Hans Dieter Poetsch warned that the scandal could pose “an existence-threatening crisis” for Europe’s largest carmaker, which is exploring options from a simple software upgrade to outright replacement of cars as a deadline approaches to present a fix for rigged diesel vehicles.

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