Boost to euro zone as factory orders up in Germany

THE EURO-ZONE economy was buoyed yesterday by a German government report showing that factory orders in the country, the biggest exporter in the world, increased by the highest amount in almost two years in May.

German manufacturing orders rose by 4.4 per cent during the month compared with April, the biggest monthly gain since 2007. The data boosted the euro on world currency markets and prompted analysts to comment that a recovery in the 16-state euro zone may be under way.

“It indicates at least that the recovery is proceeding,” Lutz Karpowitz, a currency strategist at Commerzbank in Frankfurt said yesterday.

However, there was more mixed economic news out of Ireland’s main trading partner, as weaker than expected UK industrial production data caused fresh doubts about an economic recovery and sent sterling weaker against the euro and the dollar.

“The risk is clearly that the ‘green shoots’ are turning dry,” said Michael Klawitter, a currency strategist at Dresdner Kleinwort.

The British Chambers of Commerce said an economic recovery was “not guaranteed” and called on the Bank of England to extend its quantitative easing programme to the full £150 billion proposed and seek permission to spend more.

“Discussions of extending the quantitative easing programme beyond the £150 billion is a sterling negative if you take the view that printing money is a way of cheapening the currency,” said Jeremy Stretch, a senior strategist at Rabobank International in London.

Bank of England policymakers will meet to decide on future strategy tomorrow.

A weaker sterling will further erode margins for Irish exporters. However, improved sentiment across the euro zone should have positive knock-on effects on the Republic’s manufacturing sector. The NCB purchasing managers’ index (PMI), an early snapshot of activity in the sector, last week showed that the rate of decline in Irish factory activity in June was the slowest in nine months.

Yesterday, Davy Research said in a note to investors that parts of the Irish economy were no longer in recession, with recovery being driven by multinational companies.

However, the nature of the split between sectors that are doing well and sectors that remain mired by the downturn means that the decline in employment will not reach a turning point “until the back-end of 2010 at the earliest”, he said.

In an analysis of the first-quarter national accounts, Davy economist Rossa White said the growth recorded by the multinationals based in the Republic was in part due the dominance of the sector by industries such as pharmaceuticals and software, both of which have proved resilient to the recession.

But the companies also received “a lift from cyclical improvement abroad”, he noted.

Agriculture, the other part of the economy to record quarter-on-quarter growth, benefited from higher global commodity prices, Mr White added.

“The problem is that the two parts of the economy that have improved account for less than one-third of output and a much smaller share again of employment,” he said.

“Indigenous industry is struggling badly. By April, its production was down 17 per cent from peak, and that part of industry is much more labour-intensive than the foreign-owned sector.”

There was no major economic data released from the US yesterday and investors are now braced for the imminent reporting season for second-quarter US corporate earnings in the coming weeks. – (Additional reporting: Bloomberg/Reuters)