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German factory orders reflect moderating sentiment

German factory orders for January fell much more strongly than expected over the month, which may indicate that the weakening sentiment data seen in the first months of the year is starting to be reflected in the hard data.

The fall in orders was broad-based, with the largest drops in foreign orders and capital goods, and as such could be taken as a signal that activity is indeed rolling over. However, the drop follows a marked increase in December, which was driven by a few large orders, and may partly be due to holiday effects.

Sentiment data for the first quarter has consistently painted a picture of buoyant activity coming off recent heights. So our focus is now on the extent that this moderation is reflected in the hard data, with today’s German factory orders being among the first hard data releases for January. And consistent with the narrative conveyed in the sentiment data, orders saw a large drop that significantly exceeded the already negative expectations. At -3.9% over the month, it marks the largest monthly decrease in a year. Partly, this reflects payback from the strong growth in December, when big ticket orders led to a 3% surge (revised from an initial estimate of 3.8%). German industrial data tends to be very volatile at the turn of the year, so today’s data alone should not be overstated.

Yet, while the numbers may be less bleak than they look on first glance (Chart 1), it is the case that the drop was broad-based. Core orders excluding big ticket items fell a bit less at 2.4%, while foreign orders from the Eurozone fell a substantial 5.9%, more than the rest of the world (-3.8%), as the impetus from global trade fades. The typically pro-cyclical capital goods also decreased strongly (-5.0%) in spite of the capacity constraints reported in the sentiment indices, which may indicate firms expect a slowdown in demand. Meanwhile, manufacturing turnover was also reported today and fell for the second month in a row (at -0.2%). All this indicates that tomorrow’s German industrial production could disappoint.

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