German manufacturing orders rose for the eighth month in nine in February, led by an increase in demand from domestic companies for goods such as factory machinery. Orders climbed 0.3 percent from January, when they dropped 1.3 percent, the Economics and Labor Ministry said. Economists had expect a gain of 0.5 percent. Domestic orders climbed 1.2 percent while foreign demand dropped 0.6 percent, partly hurt by the stronger euro, the ministry said in a faxed statement.
Germany's recovery from a recession in the first half of last year is being held back by consumers' reluctance to step up spending as companies keep a rein on hiring. Unemployment rose the most in a year last month as companies including Volkswagen AG and Continental AG cut jobs and transferred production abroad. ``We are in a process of recovery, it's just very moderate,'' said Reinhard Kudiss, an economist at Germany's BDI industry association, which represents 107,000 companies, including carmaker DaimlerChrysler AG. ``We will only see a relatively modest recovery in domestic demand.'' German orders for machinery-related goods climbed 4.1 percent in the month. Domestic orders for consumer goods fell 2.3 percent in February compared with a month earlier, the ministry said.
`Achilles heel'
Recent economic reports have sent mixed signals about the strength of Germany's recovery. The country's unemployment rate rose to 10.4 percent in March and business confidence fell for a second month. On the other hand, German manufacturing expanded in March as activity across the euro region grew at the fastest pace in more than three years. Consumer spending remains the ``Achilles heel'' of Germany's economy, according to Kudiss, and has prompted German Chancellor Gerhard Schroeder and European Central Bank President Jean-Claude Trichet to urge households to buy more. Thomas Cook AG, Europe's second-largest tour operator, said last week that sales dropped during the first quarter and the HDE retail sales association last month said it expects sales to stagnate this year.
Unemployment is damaging the German government's political fortunes. Schroeder's ruling Social Democratic Party in February suffered its biggest defeat since World War II in the city of Hamburg in February and earlier this years stepped down as leader of the party in an effort to end a slump in vote support.
Fading Prospects
Consumer spending is hurting growth prospects across Europe. The European Commission today cut its 2004 growth forecast for the euro region to 1.7 percent from 1.8 percent, citing the outlook for consumer confidence following last month's terrorist attacks in Madrid as one of the reasons. The ECB said in its monthly report released today that household spending is one of the main risks to its bank's outlook for a strengthening recovery this year. In the U.S. and Japan, the recovery is beginning to broaden. The U.S. economy added 308,000 jobs in March, almost three times economists' expectations and the biggest gain in four years. Executives at Japanese service companies were optimistic for the first time in seven years in March.
Some companies are struggling to benefit fully as the euro's 13 percent appreciation against the dollar in the past year make their goods more expensive abroad, according to the Economics and Labor ministry. Export orders also slipped in February after rising in the second half of last year. ``The further slight drop in foreign orders in February could partly have come from the impact of the euro's climb and partly from the extraordinarily strong expansion in the second half of 2003,'' the ministry said.
Looking to the ECB
Schroeder may look to the ECB to bolster Germany's economy if export demand fails to ignite consumer spending, which accounts for more than half of gross domestic product. ECB chief Trichet said on Saturday that rates may not stay at current levels ``for a considerable period of time'' though the bank said in its monthly report today that rates are low enough to support growth. For now, investors are reining in expectations of a rate cut, futures trading suggest. The yield on the three-month Euribor contract for June was 1.99 percent at 1:40 p.m. in Frankfurt, up from 1.88 percent a week ago. The current money market rate was 2.05 percent. In a two-month comparison, which smoothes out short-term swings, German factory orders fell 0.3 percent as domestic orders dropped 0.2 percent and foreign orders declined 0.4 percent. From a year ago, orders rose 3.1 in February after gaining 2.3 percent in the previous month. ///www.bloomberg.com