German industrial orders rebound 1.9% in May, beating forecasts as defence and transport contracts surge

German industrial orders rebounded in May after a sharp decline in April, offering a tentative sign of stabilisation for the country's struggling manufacturing sector. The Federal Statistical Office reported a 1.9% month-on-month increase, comfortably ahead of the 1.5% consensus among economists polled by Reuters. The April figure was revised to a drop of 3.2%, an improvement from the initially reported 3.8% fall.

Vehicle construction drives the surge

The headline gain was overwhelmingly driven by the "other vehicle construction" category, which covers aircraft, ships, trains and military vehicles. A series of large orders pushed the segment up 85% compared with April. The state has invested billions in infrastructure and rearmament, the statistics office noted. Machinery orders rose 3.7% and electrical equipment orders climbed 5.7%. By contrast, the automotive industry saw a 3.8% decline, and manufacturers of data processing equipment, electronic and optical products recorded a 7.8% drop.

Excluding large orders, total new business grew by a more modest 1.0%. Over the less volatile three-month comparison from March to May, orders were 0.2% lower than in the previous three months, though stripping out big-ticket contracts flips that to a 4.1% gain.

Regional split: Eurozone demand jumps

Foreign orders increased 2.2% overall, but the composition was uneven. Demand from the euro area surged 11.2%, while orders from the rest of the world contracted 3.2%. Domestic orders rose 1.3%.

Cautious optimism among economists

Up one month, down the next, the order zigzag continues. All in all, the order situation is better than a year ago.

ABN Amro Germany chief economist Alexander Krüger said difficult location conditions and planning uncertainty were clouding the outlook. DIHK economic expert Jupp Zenzen struck a guardedly positive note:

The increase in order intake gives hope that industry has coped better with the consequences of the Middle East conflict than feared.

ING analyst Carsten Brzeski added that the recovery was gradual.

Despite initial fears that the Middle East conflict could trigger new supply chain disruptions, German industry appears to have escaped with little more than a black eye.

Commerzbank chief economist Jörg Krämer warned against expecting a strong recovery, citing the ongoing uncertainty from the Iran conflict and an erosion of Germany's attractiveness as a business location.

The federal government's reform package has brought progress in individual areas, but no broad breakthrough.

Sentiment brightens but orders still falling

The Ifo Institute's June survey showed an improvement in business sentiment in manufacturing, driven by markedly better expectations. However, assessments of the current situation were revised slightly downwards.

The number of new orders fell again.

The Federal Ministry for Economic Affairs noted that after the outbreak of the Middle East conflict there had been front-loading effects followed by an expected pullback, and that the previous upward trend now appeared to be resuming, though the data remained very volatile due to large orders.