UPDATE 2-German industry orders weather Ukraine crisis in July rebound

Thu Sep 4, 2014 6:15am EDT

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(Adds quotes on Ukraine)

By Madeline Chambers

BERLIN, Sept 4 (Reuters) - German industrial orders rose at their strongest rate in more than a year in July, raising hopes that Europe's biggest economy may yet weather the crisis in Ukraine and bounce back after a tricky second quarter.

Economy ministry data released on Thursday showed a 4.6 percent month-on-month increase in orders, rising more than three times faster than the Reuters consensus forecast for a 1.5 percent increase as demand from outside the euro zone surged.

"After the uncertainty caused by geopolitical developments and a weaker economy in the second quarter, the strong rise in orders is an encouraging signal for the industrial economy," said the ministry in a statement.

Germany's gross domestic product surprisingly contracted in the three months to June, falling 0.2 percent quarter on quarter to raise doubts about whether it could prop up growth across the continent as western sanctions against Russia over Ukraine began to fuel anxiety within the business community.

Thursday's jump in orders was driven by robust demand, especially from countries outside the euro zone, for capital goods. The ministry said big-ticket items had played a role in the increase but underlying activity was also positive.

With weak investment and slow trade having driven the second quarter GDP contraction, some economists expressed fears when that data came out last month that Europe's economic engine could slip into recession in the third quarter.

But others said Thursday's data showed that the conflict in eastern Ukraine, while weighing on sentiment surveys, had not had any significant impact on hard data.

"All the talk about geopolitical tensions and their swift impact on German hard data was wrong and largely exaggerated. The Russian-Ukrainian crisis does not resemble the Lehman shock with its swift and brutal impact we had gone through six years ago," said Andreas Rees, economist at UniCredit.

EURO ZONE WEAKNESS

Markit's composite Purchasing Managers' Index (PMI) showed on Wednesday that Germany's private sector expanded at its slowest pace in 10 months in August as manufacturing grew at a weaker rate.

Some economists said they expected surveys such as the Ifo business climate index and ZEW analyst and investor index, to improve soon.

"The business surveys have yet to stabilise, after they fell a bit further in August. Our expectation is that this will begin to materialise from September," said Greg Fuzesi at JP Morgan.

Orders for capital goods rose 8.5 percent, driven by a 14.6 percent increase in demand from countries outside the euro zone while contracts from members of the single currency rose just 2.9 percent.

"On a more negative note, however, the only marginal improvement of new orders from other euro zone countries shows downside risks for the German economy currently do not mainly come from geopolitical tensions but rather from longer-than-expected weak demand from euro zone peers," said ING economist Carsten Brzeski.

The July increase in overall orders was the strongest since June last year. The data for June this year was revised up to a 2.7 percent drop from a 3.2 percent fall previously. (Reporting by Madeline Chambers; Editing by Stephen Brown and John Stonestreet)

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