German Factory Orders Plunge Across Industries

(Bloomberg) --

German factory orders slumped in May in the latest sign that global trade uncertainty is turning Europe's temporary slowdown into a more serious downturn.

The economy ministry reported huge declines in export orders and investment goods, just days after a survey showed factory activity shrank for a sixth month in June. The continued gloom is increasing concern at the European Central Bank, and a growing number of economists are predicting it will add more monetary stimulus as soon as this month.

While orders data can be volatile, there's little doubt the numbers are disappointing. The 2.2% overall drop on the month was far worse than the 0.2% fall predicted by economists in a Bloomberg survey. The year-on-year decline of 8.6% was the biggest in almost a decade.

ING said the report “wraps up a week to forget,” and JPMorgan now predicts that Germany may have contracted in the second quarter. If that happens, it would be the third time in a year that Europe's largest economy posted no growth at all.

Germany's troubles, some of which are linked to the car industry, have weighed on the euro region. Governing Council member Olli Rehn summed up the mood on Thursday, saying saying that growth has “slowed significantly” and it's no longer possible to consider the downturn as temporary.

On Friday, Commerzbank changed its forecast on ECB stimulus, predicting a 20 basis-point cut in the deposit rate this month, larger than previously anticipated.

What Bloomberg's Economists Say...

“The further deterioration in demand for Germany's exports means the improvement in conditions ECB President Mario Draghi wants to see won't be forthcoming -- that's consistent with our forecast for a rate cut in September. But if the weakness spreads to services or the euro-area's labor market begins to stutter, we think this could prompt more drastic action, including the relaunch of quantitative easing.”

--Jamie Murray, chief European economist
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The outlook for the economy -- and anticipation of another round of monetary policy easing -- has pushed bond yields lower. Germany's 10-year this week fell below the ECB's minus 0.4% deposit rate for the first time, while both Spain and France are also enjoying record-low borrowing costs.

“The eagerly expected economic recovery in Germany is still nowhere to be seen,” said Commerzbank's Peter Dixon and Joerg Kraemer. “In addition to the weakness of the auto sector, this is attributable to weak demand from China, where the extensive stimulus measures have not yet had any effect.”

--With assistance from Kristian Siedenburg.

To contact the reporter on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Fergal O'Brien

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