New orders to German manufacturing companies in May were much stronger than expected, rising 1.8% mom, when a decline was expected. This came on top of a 2.9% gain in April.
The source of strength was entirely on the domestic side, with a gain of 11.3% mom, after +2.2% in April, which pushed domestic orders well past their pre-crisis peak. The main factor in this explosion of domestic activity was that German companies are evidently boosting their investment spending further, which resulted in a 20.0% increase in domestic capital goods orders, leaving this category up 27.5% yoy. Orders for intermediate goods were also strong at +4.3% mom (10.6% yoy), and although consumer goods orders gained a mere 0.1% mom, the fact that April's 4.9% gain was not reversed is encouraging. The message from these data is clear: German companies are embarking on a spending spree, which is not surprising given the high rate of capacity utilization in industry what is surprising is the extent of this strength.
In contrast, orders received from abroad were weak, declining by 5.8% mom, and slowing to 6.4% yoy from 14.0% in April. All sub-categories were weak: intermediate goods -1.7% mom (after -2.3%), capital goods -8.3% (after +6.6%) and consumer goods -3.0% (after 3.9%).
These data are noteworthy for several reasons. One, they underline the shift from export-led to domestic demand-led growth in Germany, which is good news for the rest of the euro area and the world. Two, they illustrate the strong and building momentum in business investment in Germany. Three, the orders data suggest that manufacturing output is likely to continue to expand at a solid pace in Q3, whereas before the May data, it appeared that output had run ahead of the flow of new orders. Four, they reiterate that the PMI survey is far from the brilliant guide to short-term fluctuations in activity, given that the PMI new orders index plunged by 5.2pt in May, from 61.0 to 55.9. The ifo has once again shown just how superior a measure of activity it is.
That said, these latest figures are not sufficient to invalidate the view that Q2 GDP could be quite weak: construction is likely to have contracted, and new car registrations were down 11% qoq (sa). However, the data do support expectations of a strong Q3 rebound.
klaus.baader@sgcib.com
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