German new orders disappoint in August

Setback. German new orders dropped by 0.3% MoM in August. This was the second monthly drop in a row. On the year, new orders are still up by 2.8% but after the strong drop in July today’s numbers are a clear disappointment. The zig-zag pattern of the last year has been broken. Unfortunately in a negative way. Nevertheless, in the short term, the prospects for the German industry remains positive. Industrial production should further benefit from the recent inventory reduction and the increase in new orders earlier this year. According to latest surveys, companies have reduced their inventories to 2011-levels. In the longer term, however, the industry needs more fuel to return to full strength. Earlier today, the statistical office reported that German exports grew by 1% MoM in August, from -0.8% in July. At the same time, imports increased by 0.4% MoM, from 0.3% in July, widening the seasonally-adjusted trade balance to 15.6bn euro, from 15.0bn euro in July. As so often in the past, German exports seem to be immune against a stronger exchange rate. German trade data also suggest that the idea of Eurozone rebalancing might need some re-thinking. Since the beginning of 2011, unit labour costs in Germany increased by around 2.5% compared with the rest of the Eurozone, while they dropped sharply in Greece (-14%), Spain (-6%) and Portugal (-5%). Up to now, while these changes in relative cost competitiveness have supported export sectors in peripheral Eurozone countries, they have not harmed German exports. The reasons for the continued strength of German exports is manifold: just think of product specialisation, price insensitive demand and strong demand from non Eurozone countries. All in all, today’s data show that the German economy is only gradually recovering from the weak start of the third quarter.