July 5, 2018 / 6:50 AM / in a month

German factories hit higher gear, but backdrop uncertain

BERLIN (Reuters) - Industrial orders in Germany bounced back in May to support expectations of an economic upturn, though simmering trade and political tensions may yet act as a brake on growth.

FILE PHOTO: A worker assembles a StreetScooter electric delivery van on the production line during an opening tour in Dueren near Cologne, Germany, May 30, 2018. REUTERS/Wolfgang Rattay/File Photo

Thursday’s 2.6 percent rise in orders exceeded expectations, and followed a survey of purchasing managers that suggested Europe’s largest economy ended the second quarter on a stronger footing.

The Economy Ministry said industrial output was likely to rise moderately in coming months.

But it also noted growing uncertainty about restrictive trade policies, while the International Monetary Fund (IMF) -cutting its 2018 forecast for German GDP growth to 2.2 percent - said protectionism and a possible hard Brexit had exposed the German economy to significant short-term risks.

“The increase in orders is pleasing, but not yet a liberation,” Ilja Nothnagel, foreign trade expert at the DIHK Chambers of Industry and Commerce, said.

“The uncertainty caused by international trade policies is great,” he said, as companies could no longer be sure that growth in key markets would continue to develop positively.

Global trade tensions are threatening to come to a head on Friday with a tit-for-tat exchange of tariff penalties between Washington and Beijing.

FILE PHOTO: Mechanic staff work on the production line of Volkswagen e-Golf in the Glaeserne Manufaktur plant in Dresden, Germany May 8, 2018. REUTERS/Matthias Rietschel/File Photo

U.S. President Donald Trump’s protectionist drive also risks severely impacting Germany, whose most important export markets outside the European Union are the United States and China.

PAST ITS PEAK?

The German economy grew by a calendar-adjusted 2.5 percent last year, the strongest rate since 2011, propelled by vibrant domestic demand and resurgent exports.

But the rate dipped to 0.3 percent on the quarter in the first three months of this year.

“The upswing is alive, but it has passed its peak,” Bankhaus Lampe economist Alexander Krueger said following Thursday’s Federal Statistics Office data.

Industrial orders had declined in the previous four months, including an upwardly revised drop of 1.6 percent in April. May’s rise beat a Reuters forecast for a 1.1 percent rise.

A breakdown of the figures showed the jump was mainly driven by demand from other euro zone countries and domestic clients, with orders for capital goods and consumer goods rising the most.

The economy ministry said the four monthly drops from January to April were linked to a strong jump in orders in the second half of 2017, as well as first-quarter weakness in the global economy and “uncertainty about trade policy.”

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“The order backlog is still very high and business morale is still better than the long-term average despite a recent deterioration,” it said.

... OR JUST A BLIP?

Thomas Gitzel of VP Bank said the orders figures suggested that the German economy’s relatively weak performance in the first quarter was just a blip.

“Provided the trade dispute does not escalate further, German GDP will regain some momentum in the second half of the year,” Gitzel said.

The IMF, whose previous 2018 growth forecast for the German economy was 2.5 percent, edged its 2019 estimate up to 2.1 percent from 2.0 percent.

“Short-term risks are substantial, as a significant rise in global protectionism, a hard Brexit, or a reassessment of sovereign risk in the euro area, leading to renewed financial stress, could affect Germany’s exports and investment,” it said.

Trump has announced tariffs on a wide range of U.S. imports that threaten to unleash a global trade war, and London and Brussels remain at odds over the terms of Britain’s looming departure from the European Union.

Business daily Handelsblatt reported the U.S. ambassador to Germany had told German car bosses Trump would suspend threats to impose tariffs on cars imported from the EU if the bloc lifted duties on U.S. cars.

Germany’s VDMA industry association said engineering orders edged down by 1 percent in May in real terms from the previous year due to weaker demand from abroad, but its chief economist Ralph Wiechers said the sector’s prospects remained rosy.

“After half a year of almost double-digit growth rates, the engineering sector is obviously taking a breather... The upswing in the engineering sector is running smoothly,” he said, adding that capacity utilization had topped 90 percent in April.

editing by John Stonestreet

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