German industrial orders plunge most in nearly 1 1/2 years

BERLIN (Reuters) - German industrial orders fell more than expected in June, posting their steepest monthly drop in nearly a year and a half, suggesting that trade tensions caused by U.S. President Donald Trump might curtail growth in Europe’s largest economy.

German companies have been spooked by an escalating trade conflict between the United States and China as their tit-for-tat tariffs hit businesses in Germany. The United States is Germany’s biggest export market; China its most important trading partner.

The Federal Statistics Office said on Monday that contracts for “Made in Germany” goods fell by 4.0 percent on the month in June after rising 2.6 percent the previous month. That was the biggest drop since January 2017 and undershot a Reuters poll of analysts, who had predicted a 0.4 percent decrease.

“Disappointing new orders data show tentative signs of trade tensions hitting the German economy, which doesn’t bode well for the industrial outlook in the second half of the year,” ING Bank economist Carsten Brzeski said.

But Stefan Kipar, an analyst with BayernLB, said not too much should be read into the industrial orders data, a highly volatile indicator.

“The June reading should not hide the fact that the previous month was very strong ... This is not a catastrophe,” Kipar said. He also said that recent sentiment surveys were providing an upbeat outlook for the German economy.

The overall drop in industrial orders was driven by a 4.7 percent decline in foreign demand, with orders from countries outside the euro zone falling the most. Orders for capital goods and consumer goods came in particularly weak.

The Economy Ministry also pointed to trade tensions caused by Trump’s tariff policies: “Regarding the latest development, uncertainty caused by trade policy probably played a role.”

However, a Sentix survey showed on Monday that investor morale in the euro zone improved for the second month running in August as concern about an all-out trade war between the European Union and the United States subsided.

Trump agreed last month to refrain from imposing tariffs on cars imported from the EU while the two sides negotiated to cut other trade barriers. The decision after talks between Trump and European Commission President Jean-Claude Juncker eased fears of a transatlantic trade war.

Germany, whose automotive industry has most to lose from U.S. tariffs on car imports from the EU, is the biggest winner from the easing trade tensions between the two trading blocs, Sentix said.

In a further positive sign for the German economy, the VDMA industry association said on Monday that engineering orders jumped by 13 percent in June from the previous year as demand grew from both domestic and foreign clients.

“Engineering companies can be very satisfied with the first half of 2018,” VDMA chief economist Ralph Wiechers said, adding that investment activity had clearly picked up in Germany.

The International Monetary Fund (IMF) repeated on Monday that Germany’s reluctance to reduce its trade surplus was contributing to trade tensions and adding to risks that could undermine global financial stability.

“In (current account) surplus countries such as Germany we see hesitant measures, at best, to counteract the surplus,” IMF chief economist Maury Obstfeld wrote in a guest commentary published in German daily Die Welt on Monday.

The IMF has long urged Germany to boost domestic demand by lifting wages and investment to reduce what they call global economic imbalances. Since his election, Trump has also repeatedly criticized Germany’s export strength.

Reporting by Michael Nienaber, additional reporting by Rene Wagner and Joseph Nasr, editing by Maria Sheahan and Larry King