German Factory Orders Drop as Euro-Area Economy Struggles

German factory orders unexpectedly declined for a second month in May in a sign that the euro area’s struggle to emerge from its longest-ever recession is disrupting the recovery in Europe’s largest economy.

Orders, adjusted for seasonal swings and inflation, dropped 1.3 percent from April, when they fell a revised 2.2 percent, the Economy Ministry in Berlin said today. Economists forecast a gain of 1.2 percent, according to the median of 42 estimates in a Bloomberg News survey. Orders slid 2 percent from a year ago, when adjusted for the number of working days.

European Central Bank President Mario Draghi said yesterday that the risks to the euro-area economy are to the downside as he gave “unprecedented” forward guidance that interest rates will stay low for an extended period of time. The economy in the currency bloc, Germany’s biggest export market, contracted in the six quarters through March. Draghi reaffirmed his prediction for a recovery at a subdued pace later this year.

“German industry still has difficulties to return to full strength,” said Carsten Brzeski, senior economist at ING in Brussels. “Still-reasonably filled order books should ensure a gradual pick-up in industrial production. However, the medium-term outlook is not yet looking rosy.”

Austerity Talks

Chancellor Angela Merkel, who is seeking a third term in German elections on Sept. 22, met fellow European leaders in Berlin yesterday for talks on easing the impact of austerity on the euro area. Officials focused on measures to reduce youth unemployment, she told reporters.

The euro has dropped and bond yields have fallen since Draghi’s guidance. The single currency traded at $1.2883 at 2:15 p.m. in Frankfurt, down from $1.3009 on July 3. The pound slid to a three-month low after Bank of England Governor Mark Carney signaled yesterday that policy makers will keep rates at a record low for longer than investors had anticipated.

Portugal’s 10-year bond yield, which climbed above 8 percent on July 3 for the first time since November, was at 6.946 percent today. The Stoxx Europe 600 Index was at 291.88, up 2.2 percent over the past two days.

Germany’s domestic orders declined 2 percent in May from the prior month, today’s report showed. Overseas demand shrank 0.7 percent, with orders from the euro area slumping 3.9 percent. Orders for basic goods fell 0.1 percent from April, while investment-goods orders slid 1.8 percent. Demand for consumer goods dropped 3.1 percent, with orders from the euro area down 5.7 percent.

Volatile Trend

“The development of industrial orders in the last months has been volatile,” the German Economy Ministry said in a statement. “Excluding bulk items, orders are showing an upward trend, albeit less clearly than before. The basic trend for orders remains positive and should remain a pillar of support for industry.”

The truck business of Daimler AG, the world’s biggest maker of the vehicles, needs to accelerate spending cuts and deliveries to achieve this year’s earnings goal, Wolfgang Bernhard, head of the division, said on July 1.

Germany’s VDMA machine makers’ association cut its 2013 production forecast yesterday to a contraction of 1 percent from expected growth of 2 percent.

Some reports have pointed to a pickup in Germany’s economy. Unemployment unexpectedly declined in June, the Ifo institute’s business climate index climbed and ZEW’s investor sentiment index increased. Retail sales rose more than economists forecast in May.

ECB Support

“The German economy probably grew quite significantly in the second quarter and will continue to grow throughout the year,” said David Milleker, chief economist at Union Investment GmbH in Frankfurt. “The ECB’s decision will help calm markets and support a recovery in Europe and in Germany.”

The Bundesbank said last month that gross domestic product improved “markedly” in the second quarter, though signs of a summer slowdown are emerging. GDP rose 0.1 percent in the first three months of this year after a 0.7 percent contraction in the final quarter of 2012.

Elsewhere, Swiss consumer prices fell less than expected in June, due to higher prices for oil and fruits and vegetables. Prices decreased 0.1 percent from a year earlier after dropping 0.5 percent in May, the Federal Statistics Office said.

China Data

In China, which faces an economic slowdown, analysts must tackle a new hurdle after the nation suspended the release of industry-specific data from a monthly survey of manufacturing purchasing managers. The China Federation of Logistics & Purchasing, which compiles the figures with the National Bureau of Statistics said there’s only a limited time to analyze the large volume of responses.

The disappearance of data on industries including steel adds to issues hampering analysis of the world’s second-biggest economy, after fake invoices inflated trade numbers this year. Neither the federation’s nor the statistics bureau’s statement on the manufacturing Purchasing Managers’ Index this week gave readings on export orders, imports and finished-goods inventories or an explanation for the omissions.