German factory orders fall significantly in July, manufacturing likely to decline further in near term

German incoming factory orders dropped considerably in July. On a sequential basis, factory orders dropped 2.7 percent, partially due to the comparatively early timing of the summer holidays, which had a more negative impact on business activity in July than is assumed in the seasonal adjustment.

However, a counter-movement would be seen in August, noted Commerzbank in a research report. The impact is shown by the already available number of cars produced. On a seasonally adjusted basis, it dropped considerably in July and rose markedly in August. However, even without this effect, which is difficult to quantify, orders would possibly have dropped.

The biggest fall in orders came from outside the euro area, while domestic orders dropped comparatively moderately. Nevertheless, considering the development over a longer period, orders from outside the euro area indicate a certain stabilization. If this tendency is affirmed in the months ahead, this might at least be a signal of hope as besides problems in the automotive industry the downward trend in manufacturing was set off by a considerably softer demand from outside the euro area, which gradually spread to demand from the euro area and ultimately also from Germany.

“Nevertheless, a further decline in manufacturing is the most likely scenario for the near future, as according to the Ifo survey, the mood among industrial companies has deteriorated further in August. Therefore production is likely to fall in the coming months, with the result that the German economy will probably shrink slightly in the third quarter as well, thus fulfilling the common definition of a (technical) recession”, added Commerzbank.