German factory orders seen rebounding from biggest fall in eight years

By Joseph Nasr

BERLIN (Reuters) - German factory orders fell 7.4 percent in January, their biggest monthly fall in eight years due to a slump in domestic and euro zone demand, though the economy ministry signalled a quick rebound, citing upbeat business confidence.

The slide runs against some otherwise fairly buoyant readings on Europe's largest economy and was almost three times greater than the Reuters consensus for a 2.5 percent fall.

The sharp fall follows strong demand for new orders in the final three months of 2016. Moreover, excluding volatile bulk orders the headline figure was down by 2.9 percent.

"The business climate in the manuafacturing sector is significantly brighter than the long-time annual average so a revival of the economy in the industrial sector can still be expected," the economy ministry said in a statement.

Analysts said a strong 3.7 percent monthly increase in factory sales in January coupled with robust business confidence surveys pointed to the manufacturing sector contributing to growth during the first quarter of 2017.

"No panic: orders do not determine the short-term economic development and the early indicators are brilliant - it should continue uphill," Andreas Scheuerle of Deka Bank wrote in a note to clients.

The industry orders data showed that domestic demand fell 10.5 percent in January. Meanwhile, foreign orders declined 4.9 percent, driven by a 7.8 percent fall in demand from the euro zone.

The main drag came from capital goods -- especially automobiles -- which saw a 9.9 percent decrease in orders.

Markets appeared to shrug off the data. The euro traded flat against the dollar at 1.0575 while the DAX stock index was fractionally higher.

BUSINESSES UPBEAT

Germany's traditionally export-oriented economy faces a series of risks this year, including unpredictable elections at home and in France, protectionist trade policies under U.S. President Donald Trump, and Britain's Brexit negotiations.

The government forecasts economic growth will slow to 1.4 percent this year from 1.9 percent in 2016. Three key economic drivers - construction, consumption and government spending - are seen losing momentum with euro zone interest rates unlikely to drop any further and as inflation rises. There will also be fewer working days this year than last.

Some analysts were less sanguine in their readings of Tuesday's industrial orders data.

"Today's disappointing data is also a good reminder that the German industry is having more problems returning to full speed than buoyant sentiment indicators have been suggesting," Carsten Brzeski of ING Diba said in a client briefing note.

Over a 12-month period, orders contracted 0.9 percent, Brzeski said.

Others more optimistic of a rebound in industrial orders point to the upbeat business confidence in February and increases in engineering orders.

"Companies remain optimistic despite growing economic and political concerns. They expect a revival of exports," said Sophia Krietenbrink of the DIHK Chambers of Industry and Commerce.

Thomas Strobel of UniCredit said he expected manufacturing to contribute to growth in the January to March period.

"The upward trend in the German manufacturing sector remains intact," Strobel wrote in a note to clients.

"The manufacturing sector should continue to benefit from significantly above-average capacity utilization, resulting in more capex spending, as well as a vibrant construction sector, characterized by a good amount of pent-up demand."

(Editing by Madeline Chambers and Richard Lough)