German June Orders Unexpectedly Fall a Seventh Month

By Gabi Thesing

Aug. 6 (Bloomberg) -- German factory orders unexpectedly fell for a seventh month in June, increasing the likelihood Europe's largest economy contracted in the second quarter.

Orders, adjusted for seasonal swings and inflation, declined 2.9 percent from May, the Economy Ministry in Berlin said today. That's the biggest drop since July 2007. Economists expected a gain of 0.4 percent, the median of 39 forecasts in a Bloomberg News survey showed. Orders fell 6.1 percent from a year earlier.

Manufacturing in Germany and Europe is faltering as higher energy and food prices push up production costs for companies and damp household spending power just as slower global growth and a stronger euro weigh on demand for exports.

``This series of declines is unprecedented,'' said Alexander Koch, an economist at Unicredit Markets & Investment Banking in Munich. ``It's the final nail in the coffin for second quarter growth and certainly increases the likelihood of a recession. Any inventory backlog that we have thought could carry German industry into the second half of the year is well and truly gone.''

The euro dropped to as low as $1.5464 euros from $1.5485 before the report. It's the fifth month in a row that orders defied economists' expectations of an increase.

Euro-Area Drop

Foreign sales dropped 5.1 percent, while domestic orders fell 0.6 percent in June. Orders from the euro area declined 7.7 percent and demand from outside the region fell 3.1 percent.

Heidelberger Druckmaschinen AG, the world's largest printing- press maker, yesterday posted its first quarterly loss in three years as higher raw-material costs squeezed margins and customers in the U.S. delayed purchases. The company said full-year profit will decline ``significantly'' as a stronger euro hurts revenue in the U.S. and Asia.

Bayerische Motoren Werke AG Chief Executive Officer Norbert Reithofer said on Aug. 1 that 2009 would be ``another difficult year'' for the world's largest maker of luxury cars as falling U.S. sales, the stronger euro and rising costs for plastics, steel and oil hurt profit. Car sales in the U.S., BMW's biggest market, have fallen 10 percent this year as soaring gasoline prices and slower economic growth hurt consumer spending.

Double Trouble

``Manufacturers are squeezed at both ends,'' said Matthias Rubisch, an economist at Commerzbank AG in Frankfurt. ``No one's buying at home and growth in the main export markets is falling off rapidly.''

The euro has gained 12 percent against the dollar and 17 percent against sterling over the past year. The price of oil surged to a record $147.27 a barrel last month and is up 65 percent from a year earlier.

Inflation in the 15-nation euro area accelerated to a 16-year high of 4.1 percent last month. In Germany, which accounts for about a third of the region's economy, annual price gains held at 3.4 percent, the most since records began. The ECB aims to keep inflation just below 2 percent.

Germany's economy may shrink in the second quarter after it expanded at the fastest pace in 12 years in the first three months, Deputy Economy Minister Walther Otremba said June 24.

The euro area, which takes just over 40 percent of Germany's exports, probably contracted 0.5 percent in the second quarter, economists from French bank Societe Generale estimate. The U.K. economy, which ranks third as a destination for German exports, expanded 0.2 percent in the second quarter, matching the slowest pace since 2001.

China Orders

Not all German companies are suffering, though. Siemens AG, Europe's largest engineering company, reported third-quarter earnings that beat analyst estimates on increased orders for power plants and generator updates in Russia and China.

Siemens said yesterday it will get 10 billion euros ($15.5 billion) of annual orders from China by 2010 as the country boosts spending on utilities and transport networks.

Other companies profit from the oil price boom. BASF SE, the world's biggest chemical maker, last week reported profit that beat analyst estimates for a sixth straight quarter as record crude prices bolstered its oil and gas unit and demand for pesticides surged.

Adding to company and household concerns, the European Central Bank raised borrowing costs to a seven-year high last month to combat the threat of an inflation spiral. Policy makers are concerned companies will raise prices and workers demand higher wages to compensate for the increase in energy prices.

The bank raised the benchmark lending rate by a quarter point to 4.25 percent and is expected to leave the rate unchanged tomorrow, a Bloomberg survey of economists shows.

``With these kind of interest rates you can forget about an economic upswing,'' Rubisch said.

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net