German Factory Orders Slump for Third Consecutive Month, Casting Shadow on Manufacturing Sector

New factory orders in Germany continued their downward trend in March, falling 0.4% month-over-month, according to a report by Moody's Analytics. This marks the third consecutive monthly decline, underscoring the persistent weakness in demand for industrial goods and raising concerns about the outlook for the German manufacturing sector.

The February print was also revised significantly lower, showing a decline of 0.8% month-over-month instead of the previously reported increase. As a result of this downward trend, sales in March were 1.9% lower compared to the previous year.

Both domestic and foreign orders experienced mixed results in March. While orders from foreign clients grew by 2%, driven by a surge in orders from the eurozone, domestic orders fell sharply by 3.6%. This divergence reflects the ongoing challenges faced by the German economy, including high energy costs stemming from domestic energy policies and the EU's embargo on Russian imports.

"The fact that domestic orders are underperforming so markedly compared with foreign orders speaks to these exacerbated issues in the German economy," states the Moody's Analytics report.

The weakness in manufacturing activity is further evidenced by the dismal outlook expressed by manufacturers in recent purchasing managers' index and economic sentiment surveys. Despite a slight uptick in industrial production in February, overall output remains significantly below pre-pandemic levels.

While the manufacturing slowdown could potentially lead to job losses, German factories have so far avoided widespread layoffs due to the country's short-time work policies, which subsidize pay for reduced working hours. The number of individuals receiving these benefits has been rising, indicating a preference among German firms for labor hoarding rather than outright job cuts.

The report concludes that the March factory order data paints an unfavorable picture for the German manufacturing sector, with little prospect for a significant rebound in the near term. A recovery in demand is likely to depend on lower prices and interest rates, which are not anticipated until the second half of the year at the earliest.

"In sum, the March factory order data did little to brighten our view about the current state of the manufacturing sector in Germany," states Moody's Analytics. "We are waiting for lower prices and interest rates to reignite appetites for goods and get the economy growing again. But this will not likely be until the second half of the year at the soonest."