German Orders Unexpectedly Drop, Extend Losing Streak

By Gabi Thesing

Sept. 4 (Bloomberg) -- German factory orders unexpectedly fell in July, extending their longest-ever declining streak and increasing the likelihood that Europe's largest economy is heading for a recession.

Orders, adjusted for seasonal swings and inflation, slid 1.7 percent from June, the Economy Ministry in Berlin said today. Economists expected a gain of 0.3 percent, the median of 35 forecasts in a Bloomberg News survey showed. Orders slid 0.7 percent from a year earlier.

Germany's economy contracted 0.5 percent in the second quarter and may not recover in the third as exports falter and consumer spending slumps. Even though oil prices have retreated 24 percent since a July record, business confidence declined to a three-year low last month and consumer optimism fell to the lowest level in five years.

``Orders declining for eight straight months is unprecedented and a frightening prospect,'' said Sebastian Wanke, an economist at Dekabank AG in Frankfurt. ``We expect that the economy will contract in the third quarter as Germany's main export markets are slowing and consumer spending is unlikely to pick up.'' Wanke expects a ``marginal'' recovery in the fourth quarter.

Defying Expectations

The euro fell as low as $1.4466 from $1.4529 before the report was released. It's the sixth month in a row that orders defied economists' expectations of a gain. The ministry revised June's decline to 2.6 percent from an initially reported 2.9 percent.

This month's drop was led by a 3.6 percent slump in domestic orders. Foreign sales increased 0.3 percent, with orders from the euro area rising 8.1 percent. Demand from outside the region fell 5.7 percent.

The ministry said there was ``an unusually large volume of big ticket orders'' in the month.

European Aeronautic, Defense & Space Co. the German-French aerospace manufacturer, said July 30 it won 60 percent of $64 billion in orders at the U.K.'s Farnborough air show that month, including an order of five freighters form Italy's cargo startup Alis Aerolinee Italiane.

The VDMA lobby said last week that plant and machine orders declined for a third straight month in July, as a stronger euro and slowing global economic growth curbed demand for exports.

Party's Over

``The party in Germany's industrial sector is over,'' said Aline Schuiling, an economist at Fortis Bank in Amsterdam. ``In fairness, it has come down from unusually high levels. But still, there is now a danger that companies will start cutting jobs.''

The price of oil rose to a record $147.27 a barrel on July 11, pushing inflation in the euro area to a 16-year high of 4 percent and sapping consumer's purchasing power and boosting company's bills.

Car sales declined 10 percent in August from a month earlier, Germany's Federal Vehicle Administration organization said earlier this week. German retail sales fell in July and August, data from the Federal Statistics Office and the Bloomberg Retail PMI showed last week.

Automakers are not only hit by weakening domestic demand. 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.

Still High

While the price of oil and the euro's exchange rate against the dollar have both fallen from their peak, they are still up 46 percent and 6 percent respectively from a year ago.

Adding to the pressures on companies, the cost of borrowing is likely to remain at a seven-year high and may even increase.

European Central Bank Governing Council member Axel Weber, who also heads Germany's Bundesbank, said last week he doesn't ``expect inflation to come down necessarily just with weaker growth'' and that once the ``economic outlook brightens somewhat,'' interest borrowing costs may have to be increased.

The ECB kept the benchmark lending rate at 4.25 percent at its monthly policy meeting in Frankfurt today.

Euro-region inflation slowed to 3.8 percent in August from a 16-year high of 4 percent in the previous month. That's still almost twice the ECB's 2 percent limit.

The 15-nation euro area, which takes just over 40 percent of Germany's exports, is also teetering on the brink of a recession after contracting 0.2 percent between April and June.

Some German companies seek to cushion the decline in orders from Europe by expanding in emerging markets. Hochtief AG, Germany's largest builder, reported a jump in second quarter profit on Aug. 14 and increased its full-year forecasts on rising demand for construction and mining work in Australia and Asia.

Earlier this week, the company said it secured orders worth 221 million euros ($320 million) in Australia.

German consumer spending may also receive a boost as oil prices decline and the country's labor market holds up. German unemployment fell more than economists expected in August, pushing the jobless rate to the lowest level in 16 years.

Still, the ``peak in economic growth is likely to be behind us,'' Weber told Bloomberg News in an interview published Aug. 27.

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