Strongest increase in industrial orders for almost three years

German industry received significantly more orders than expected in May: 6.4 percent compared to the previous month. Rising interest rates and material shortages are still causing concerns for companies.

In May, German industry recorded the largest increase in orders for almost three years, as announced by the Federal Statistical Office. Orders grew 6.4 percent month-on-month, the strongest gain since June 2020.

Economists surveyed by the Reuters news agency had expected an increase, but only by 1.2 percent. In April, new business grew by just 0.2 percent, but fell by 10.9 percent in March.

Positive development at home and abroad

“All in all, the recently fluctuating orders are stabilizing,” emphasized the Federal Ministry of Economics. However, the less fluctuating three-month comparison illustrates the continuing challenging situation: from March to May, orders were 6.1 percent lower than in the three months before.

Domestic orders in May rose 6.2 percent mom, while overseas demand rose 6.4 percent. The vehicle industry had a particularly positive influence with an increase of 8.6 percent and other vehicle construction with an increase of 137.1 percent. The latter includes the construction of ships, rail vehicles, aircraft and spacecraft, and military vehicles.

Every third industrial company complains Materialknappheit

The export-dependent industry is struggling with the global rise in interest rates, with which central banks want to get inflation under control. This makes loans for German export hits such as vehicles and machines more expensive, which in turn puts pressure on demand. In addition, almost every third German industrial company complains about material shortages.

In June, 31.9 percent reported bottlenecks in preliminary products and raw materials, after 35.3 percent in May, as reported by the Munich ifo Institute. “Unfortunately, the relaxation can hardly do anything to counteract the downturn in industry,” said Klaus Wohlrabe, head of the ifo surveys. “Orders can be processed faster, but too few new ones are coming in at the moment.”

Economists see no trend reversal

Despite the strong increase in orders, economists are not giving the all-clear. “At first glance, the increase in orders in May looks great,” said Commerzbank chief economist Jörg Krämer. “But half of it is due to the fact that the large orders, which have always been fluctuating, are recovering.”

“Once again, the significant increase is primarily due to the volatile component of ‘other vehicle construction’,” explained VP Bank chief economist Thomas Gitzel. The latter increased by 137.1 percent compared to the previous month. “Without this component, the balance sheet would be far less gratifying.” Incoming orders are down 4.3 percent compared to May 2022. “The German economy will probably post a decline in GDP in 2023 as a whole,” says Gitzel.

The trend in new business is pointing downwards, and the companies have largely processed the orders that were left pending during the Corona crisis. Therefore, “there is much to suggest that the German economy will shrink again in the second half of the year.” The chief economist at Hauck Aufhäuser Lampe Privatbank AG, Alexander Krüger, takes a similar view. “The weak global economic environment will hardly spark any new orders,” he said. “The production outlook for the second half of the year remains clouded.”