German industrial orders fall sharply

German Chancellor Angela Merkel and Economy Minister Philipp Roesler on September 29, 2011 in Berlin, Germany.

Story highlights

  • A 2.7 per cent drop in orders compared with December highlighted the vulnerability of Europe's largest economy to global growth prospects.
  • January's drop in industrial orders included an 8.6 per cent fall in demand from non-eurozone countries.
  • Economists said Germany could still escape a technical recession and remained poised for activity to speed up again after a weak end to 2011.

Germany's economic rebound, which has helped counter gloom created by Europe's debt crisis, was set back in January by an unexpectedly sharp fall in industrial orders, especially from beyond the eurozone.

A 2.7 per cent drop in orders compared with December, reported on Wednesday by the Berlin economics ministry, highlighted the vulnerability of Europe's largest economy to global growth prospects and a possible significant slowdown in countries such as China. December had seen a 1.6 per cent rise.

Economists said Germany could still escape a technical recession, defined as two quarters of economic contraction, and remained poised for activity to speed up again after a weak end to 2011, with domestic demand becoming a more important driver of growth. Soaring oil prices could yet pose a threat, however.

"We still think that the German economy is back on an expansionary path. The global cycle is still all right, financing conditions in Germany are pretty good," said Dirk Schumacher, economist at Goldman Sachs in Frankfurt. "What worries me are oil prices, because they have the potential to stop growth but that hasn't happened yet."

January's drop in industrial orders included an 8.6 per cent fall in demand from non-eurozone countries. German orders, in contrast, rose 0.9 per cent compared with December.

The orders data are often volatile and in December orders from outside the eurozone rose 12.1 per cent month-on-month. The economics ministry added that the latest figures had been distorted by a below-average volume of large orders but admitted that "incoming orders had started weakly overall in the new year".

The data struck a cautious note before Thursday's European Central Bank interest rate setting meeting. Since the start of the year, Mario Draghi, ECB president, has spotted "tentative signs of a stabilisation in economic activity at a low level" across the eurozone but warned about high levels of uncertainty. The ECB is waiting to see the impact on the real economy of its injections more than €1tn in three-year loans into the eurozone banking system. The central bank is expected to leave its main interest rate unchanged on Thursday at a record low of 1 per cent.

German gross domestic product fell 0.2 per cent in the final three months of 2011 compared with the previous quarter. But hopes of a quick rebound have been boosted by a strong rise in economic optimism shown by the Ifo business climate index -- which rose in February for a fourth consecutive month -- to its highest level since July.

Steady falls in German unemployment have also helped support domestic demand, while low ECB interest rates and its generous provision of liquidity mean that German companies and households have had scant problem in obtaining liquidity.

Alexander Koch, economist at UniCredit in Munich, still expected demand from emerging market economies for German goods and services to to compensate for weakness in the eurozone and expected the orders data to see a "gradual recovery" in dynamism.