German factory orders plunged the most since 2009, underlining the risk of a slowdown in Europe’s largest economy. Orders, adjusted for seasonal swings and inflation, fell 5.7 per cent in August, after climbing 4.9 per cent in July, the Economy Ministry in Berlin said today.

Orders fell 1.3 per cent on the year. Deteriorating confidence is undermining a rebound in Germany’s economy from a second-quarter slump. The 18-nation euro region is struggling to sustain its recovery amid rising political tension with Russia over its support of separatists in Ukraine and inflation that’s running at a fraction of the European Central Bank’s definition of price stability. “Geopolitical risks, especially the crisis in Eastern Ukraine, have made companies cautious about their investment plans, despite very favorable fundamental and funding conditions,” said Christian Schulz, senior economist at Berenberg Bank in London. “Once these uncertainties fade confidence and thus investment should rebound.”

The euro is up 0.1 per cent today and traded at $1.2532 at 9:11 a.m. Frankfurt time. The yield on German 10-year bonds was down 2 basis points at 0.9 per cent.

Export orders

Export orders dropped 8.4 per cent in August, while domestic demand slid 2 per cent, the ministry said. Investment-goods orders plunged 8.5 per cent and basic goods orders slid 3 per cent, while consumer goods rose 3.7 per cent. While August orders were weak partly because of school holidays, they were also affected by the slowing euro-area economy and geopolitical risks, the ministry said. Euro-area inflation was 0.3 per cent last month, compared with the ECB's goal of just under 2 per cent. A slowing Chinese economy and spiraling international sanctions against Russia have weakened business and investor sentiment. The euro area is still on track for a "modest economic expansion in the second half," even though risks remain on the downside, ECB President Mario Draghi said last week.

The Governing Council kept interest rates unchanged at record lows and said it will start buying covered bonds and asset-backed securities to support the economy.

“The outlook for the German economy is subdued,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “I’m not sure we’ll see growth in the third quarter.”

Bloomberg