By Nina Koeppen
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--German industry started the third quarter on a surprisingly robust note, defying deteriorating export expectations and a strengthening euro.
Although few economists had doubted that industrial orders and production picked up in July, the actual level of activity baffled even the most optimistic economists after recent surveys had shown a decline in business expectations.
Manufacturing orders jumped 1.8% on the month in July - a 1% rise was penciled in - and the economics ministry also revised up its data for June and May.
Equally surprising, industrial output rose 1.2% in the same period, more than compensating for an 0.4% monthly decline in June.
"The better than expected outcomes for German orders and production highlights the strength of growth in the near-term," said UBS economist Edward Teather. "It has laid the foundations for a healthy expansion in output in the third quarter."
There was more good news Thursday. After reporting a 27% leap in July orders for German plant and machinery makers last week, the industry's association VDMA said it expects a 2% rise in production in 2007.
The strength of German industry should add weight to the "hawkish tone" of recent comments from members of the European Central Bank, said Jennifer Upham, an economist at Capital Economics.
The ECB has raised rates four times since December and economists expect the bank to hike rates again in October and December, lifting the key rate to 3.5% by then.
But upbeat German data do not tell the full story. There are risks, too, with economic growth in the U.S. and Asia seen easing.
"We don't expect the global economic dynamic will continue to develop as it has," cautioned VDMA president Dieter Brucklacher. "Judging from the U.S., we can already observe a temporary slowing."
Alexander Koch, an economist at HVB, pointed out: "The trend in new order growth points clearly south despite unusually high big ticket orders for capital goods in July. Consequently, production activity is also poised to follow suit with a time lag."
A strengthening euro - it has appreciated about 6% versus the dollar since the start of 2006 - may also impact future demand negatively, making exports to countries outside the euro zone more expensive.
That will be of particular concern to German firms, which have benefitted to a greater extend than their European neighbors from demand from the U.S., Asia, the Middle East and Russia. Industrial orders from outside the euro zone surged 7.1% on the month in July, while tickets from within the euro zone fell 3.3%.
Most European businessmen and politicians don't like to see the euro appreciating too strongly.
Lex Hoogduin, chief economist at Dutch asset manager Robeco, isn't overly concerned about that. "If you look at the euro's exchange rate, it is difficult to pinpoint a rate when it becomes a drag on economic growth," he said, "but at the moment we are far from that."
-By Nina Koeppen, Dow Jones Newswires; +44 207 842 9314; email@example.com
(END) Dow Jones Newswires
September 07, 2006 09:29 ET (13:29 GMT)
Copyright (c) 2006 Dow Jones & Company, Inc.
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