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UPDATE 1-German industry orders slide on weak domestic demand

Friday, 5 Oct 2012 | 6:54 AM ET

* German ind orders - 1.3 pct vs f'cast for -0.5 pct

* Slide due to 3.0 pct drop in domestic contracts

* Euro zone orders climb 2.4 pct

(Adds details, quotes, background)

By Sarah Marsh

BERLIN, Oct 5 (Reuters) - German industrial orders dropped in August as a slide in domestic demand outweighed an improvement in euro zone contracts, denting hopes that domestic appetite will sustain growth in Europe's largest economy.

Seasonally and price-adjusted order intake dipped 1.3 percent on the month, missing by a wide margin the mid-range forecast in a Reuters poll for a 0.5 percent drop. Domestic bookings tumbled 3.0 percent.

Domestic contracts for capital goods in particular slid 6.8 percent, outweighing a solid 5.3 percent rise in euro zone orders for those goods. Foreign orders overall were unchanged while euro zone orders were up 2.4 percent.

"During the summer months, the German economy's safety net against the euro crisis has become dangerously thin," said ING's Carsten Brzeski, noting that euro zone orders were still down 12.6 percent on the year despite this month's gain.

"Order books have rapidly become smaller and at the same time companies have increased their inventories; a combination boding ill for growth in the coming months. The downswing in German industry will continue," he said.

Germany's economy recovered swiftly from the 2008/09 financial crisis, outpacing its peers and emerging as the euro zone's powerhouse, but there are growing signs it is losing momentum as the region's debt crisis starts to hit home.

Growth slowed in the second quarter to 0.3 percent from 0.5 percent in the first, as uncertainty over the crisis prompted firms to hold back on investment and European austerity measures weighed on demand for German goods among key trading partners.

Domestic demand had been expected to make up for some of the decline in foreign appetite, given a robust labour market and wage hikes over the past year.

But Friday's data showed a 1.5 percent fall in domestic orders for consumer goods, adding to evidence that Germany needs to do still more to boost domestic demand and balance its traditionally export-driven economy.

Andreas Scheuerle at Dekabank said Friday's data suggested orders would weigh on growth in the third quarter.

"Today's data suggests a decline in orders in the third quarter," said Andreas Scheuerle at Dekabank. "If you assume stagnation in September, the minus will be around 1.5 percent on the quarter."

A TURNAROUND ON HORIZON?

Recent data on Germany's economy has been mixed. Exports and output unexpectedly rose in July, although they are forecast to have fallen in August, according to Reuters polls.

But German business sentiment dropped for a fifth straight month in September and unemployment rose. Meanwhile, a purchasing managers' survey showed the manufacturing sector shrinking for a seventh straight month in September, though there were signs the decline may be bottoming out.

"We do not expect a stronger decline in economy activity at the moment," said the Economy Ministry in a statement on the industry order data. "The industrial sector should develop cautiously for the time being."

Bernd Hartmann at VP Bank said that even though September's PMI survey suggested a turnaround in the manufacturing sector, the workload would remain below average for the time being.

"The first impulses should come in spring at the very earliest, when the business climate brightens," he said.

German business daily Handelsblatt reported on Friday that the International Monetary Fund would cut its German growth forecasts for both this year and for 2013 to 0.9 percent, when it officially releases its estimates next week.

The orders data for July was revised downward to a rise of 0.3 percent from a gain of 0.5 percent.

(Additional Reporting by Annika Breidthardt, editing by Gareth Jones)

((sarah.marsh@thomsonreuters.com)(+ 49 30 2888 5226))

Keywords: GERMANY ECONOMY/ORDERS