German Economic Woes: Factory Orders Sink Ahead of ECB Decision

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**German Factory Orders Disappoint, Clouds ECB’s Decision**

German factory and ECB decision
German industrial orders fall short of expectations, casting a shadow over the European Central Bank’s upcoming decision on interest rates.

Factory Orders Stall

As the European Central Bank (ECB) prepares to make its interest rate announcement today, weak data from Germany, the eurozone’s largest economy, has emerged. The country’s industrial orders unexpectedly dropped by 0.2% in April compared to the previous month, confounding economists who had forecast a 0.5% gain.

The decline extends the annual contraction to 1.6%. According to the federal statistics office, the dip was largely driven by a sharp reduction in large-scale orders across various manufacturing sectors.

However, excluding these large-scale orders, new orders actually experienced a modest 2.9% growth compared to March.

ECB Rate Cut Signals Remain Strong

Despite the disappointing factory orders data, economists anticipate that the ECB will proceed with a 25-basis-point interest rate reduction today. The consensus view is that inflation concerns have eased, paving the way for a loosening of monetary policy.

Shaan Raithatha, a senior economist at Vanguard Europe, believes that the recent rally in services inflation is not enough to deter the ECB from taking action. “The inflation outlook is looking promising,” Raithatha said, adding that the central bank has signaled its intention to implement further interest rate cuts in the future.

Former ECB President Weighs In

  • Former ECB President Jean-Claude Trichet acknowledged the recent inflationary pressures but suggested that the ECB would be prudent in its approach.
  • Trichet predicted that the central bank would follow through with a 25-basis-point cut in June.
  • However, he cautioned against expecting overly aggressive rate reductions, given the need for caution and the ongoing economic recovery.

Economists Predict Gradual Easing

Azad Zangana, a senior European economist at Schroders, anticipates a more measured approach to ECB rate cuts. He believes the June cut will be followed by intermittent reductions at alternate meetings.

“We see the ECB continuing with its dovish stance, with rate cuts in September and December,” Zangana said, echoing the sentiment expressed in a recent Reuters poll of economists.

Conclusion

The German factory orders data may have dampened expectations, but it is unlikely to derail the ECB’s plan for a rate cut today. Economists believe that the central bank will prioritize the broader economic outlook and recent signs of inflation moderation in making its decision. However, the pace and timing of future rate cuts remain subject to ongoing developments in the eurozone economy.

Data sourced from: cnbc.com