German Factory Orders Jump 3.1% in June, Masking Weak Core Demand

German factory orders rose 3.1% in June, but the gain was driven by large-scale contracts while underlying demand slipped.

German factory orders rose 3.1% in June, beating forecasts, but the gain was driven by large-scale contracts as underlying demand slipped 0.5%, clouding the outlook for Europe's largest economy.

"Germany's economic resilience in recent months has come as a positive surprise to us," said Felicitas Henze and Robin Winkler, economists at Deutsche Bank. "Far from dipping into a technical recession, the economy appears to have taken the Middle East conflict in its stride."

New manufacturing orders rose 3.1% on month on a seasonally and calendar adjusted basis, the Federal Statistical Office, Destatis, said Thursday. A consensus of economists polled by The Wall Street Journal had expected a decline of 0.4%, while a Reuters poll pointed to a 0.3% rise. Excluding large-scale orders, new orders fell 0.5% from the previous month. Orders rose 6.5% compared with June last year.

The monthly increase was led by a 22.7% surge in orders for computer, electronic and optical products and a 12.7% gain in machinery and equipment orders, where large-scale contracts were recorded. Automotive orders rose 3.8%, while demand for other transport equipment, including aircraft, ships, trains and military vehicles, plunged 41.7% from the previous month's elevated level. Capital goods orders rose 6.4% and consumer goods orders increased 4.2%, while intermediate goods orders fell 2.5%. Domestic orders climbed 7.8%, while foreign orders edged up 0.2%, with demand from outside the euro area up 10.2% offsetting a 14% decline from euro-area countries.

In the less volatile three-month comparison, new orders from April to June were 1.3% higher than in the preceding three months, though excluding large orders they were unchanged. Destatis revised May's monthly increase sharply down to 0.3% from an initially reported 1.9%, citing an amended adjustment for price changes. Manufacturing turnover fell 1.3% on month in June and declined 0.4% from a year earlier.

The headline masks a fragile core. Germany's manufacturing sector has held up this year despite a sharp rise in oil and gas prices after the outbreak of war in the Middle East, with businesses stockpiling essential parts and equipment to get ahead of further disruption. Data published last week showed the German economy grew 0.2% in the three months through June, sidestepping recession concerns.

Rate Path and Rhine Disruption Cloud Second Half

The sector faces fresh headwinds in the second half. After easing tensions in June, a resumption of hostilities between the U.S. and Iran in July continues to pile cost pressures on German industry. The European Central Bank raised interest rates in June and, after staying on hold in July, is increasingly likely to hike again in September for the second time since the outbreak of the Iran war as inflation concerns grow, economists say. Higher borrowing costs squeeze factory margins.

A record-breaking heatwave is also disrupting supply chains. Water levels along the Rhine, which carries about 6% of Germany's total freight, have fallen to record lows, which economists say could cut economic growth this year by 0.3 percentage point. ECB officials have flagged the growing risk that extreme heat poses to growth and inflation.

German industry has been supported by the government's infrastructure and defense spending program, which may total more than $1 trillion over the coming years, though economists expect the benefits to emerge only gradually. The last time factory orders posted a comparable monthly swing, in early 2025, the subsequent three-month trend proved volatile, showing how large-scale contracts can distort the headline reading.

This article is for informational purposes only and does not constitute investment advice.