Global Daily – Early signs of trough in Europe

by: Aline Schuiling

Euro Macro: German factory orders bounce back – The volume of orders received by Germany’s manufacturing sector rose by 2.6% mom in May. This rise in May followed upon four monthly drops of more than 6% in total. The rebound in orders suggests that the sector has passed the worst and that production will stabilise in the coming months before picking up during later this year. So the end of the export-driven soft patch in the German and eurozone economies might well be on the horizon. This scenario was also pre-signalled by surveys such as Germany’s IFO indicator and PMIs for May and June, which continued to edge lower but at a much less severe pace than in the first months of the year. The bottoming out seems to be consistent with some firming in world trade growth in April as well as some improvement in export data in a number of Asian economies more recently. Still, the risks to this outlook are tilted to the downside as an ongoing trade conflict between the US and Europe would hurt Germany relatively hard. Indeed, the share of exports to the US in Germany’s total exports is around 9% and the share of exports to the US in Germany’s GDP is 3.5%, which is more than twice as high as in France, for instance. The details of Germany’s factory orders suggest that the weakness in the first months of this year began in foreign orders from outside the eurozone, but quickly spread to domestic orders and orders from other eurozone countries, although the monthly data are very volatile and can also be distorted by big-ticket items. (Aline Schuiling)