Germany's factory orders in April fell more than expected, increasing the risk of an economic contraction in the second quarter.

Germany's factory orders in April fell more than expected, further exacerbating concerns that the market's largest economy in Europe may shrink in the second quarter due to the impact of the Middle East war and soaring energy costs. Data released by the German Federal Statistical Office on Monday showed a 3.8% decline in factory orders in April compared to the previous month, which was lower than the expected 2% decline forecast by economists. Prior to this, data for March was revised downwards to show an increase of 4.5%. The decline in Germany's factory orders exceeded expectations The Federal Statistical Office of Germany stated that the decline was mainly driven by the automotive and electrical equipment industries, with the machinery sector also having a negative impact on the data. Large orders did not have an impact on the overall result. The three-month indicator with lower volatility showed a 3.1% decrease in factory orders. The German Ministry of Economics stated in a declaration, "Increasing signs indicate that rising energy and commodity prices, as well as significant geopolitical uncertainty, are increasingly leading to a decrease in demand, especially in the capital goods sector." "Against the backdrop of rising costs, increasing uncertainty, and ongoing supply chain bottlenecks, industrial activity may still only show moderate growth in the coming months." Germany's economy started the year well, achieving a growth of 0.3% in the first quarter. However, the Middle East conflict is increasingly putting pressure on consumers and businesses. A contraction in business activity in April and May has increased the likelihood of the German economy shrinking in the second quarter. The German Central Bank released a report on May 21 stating that the consequences of the Middle East conflict will lead to a slowdown in the German economy this quarter. It is currently expected that the overall economy will stagnate. The report stated that due to the impact of the Middle East conflict, the German economy is expected to stagnate in the second quarter. Rising inflation and its resulting decrease in purchasing power are restraining private consumption, which in turn affects service providers related to consumers; high energy prices and increasingly severe supply bottlenecks are also weighing down on the industrial and construction sectors from the supply side. Jrg Kramer, Chief Economist at Commerzbank, also holds a similar pessimistic view. He warned that the German economy is likely to experience a "mild contraction" in the second quarter. Ulrich Kater, Chief Economist at Dekabank, had previously pointed out that relevant indicators suggest that the economic situation in Germany in the second quarter will remain very weak, with the German industrial sector facing particularly severe challenges. Whether there will be a recovery in the second half of the year will depend on a diplomatic resolution to the Middle East conflict and the level of economic policy reform in Germany. Further headwinds faced by the German economy come from the ongoing trade tensions between the United States and the European Union, as well as the possibility of continued interest rate hikes. It is generally expected that the European Central Bank will raise borrowing costs later this week. Although the fiscal stimulus funds amounting to billions of euros received by the German defense and infrastructure sectors are expected to provide some support, these positive effects are increasingly being overshadowed by negative factors such as war. At the same time, data released last week also showed that progress on the launch of a 500 billion (approximately $577 billion) infrastructure fund is slow. The European Commission released its spring economic outlook report on May 21, stating that due to U.S. tariff policies, high energy prices, and geopolitical risks, the growth forecast for the German economy this year will be significantly reduced to 0.6%, halving the forecasted growth of 1.2% from the previous autumn. Industry insiders believe that the consequences of the Middle East conflict may lead to a risk of "stagflation" for the German economy, amplifying the decision-making dilemma faced by the German government and continuing to test the resilience of German economic policies. In late April this year, the German government forecasted a growth of only 0.5% for the German economy this year, halving the growth forecast of 1% from January this year. Research from the Cologne Institute for Economic Research suggests that the Middle East conflict leading to disruption in global supply chains and rising energy prices may cause the German economy to stagnate, with exports, investments, and consumption all severely affected. The grim economic outlook also poses a blow to Chancellor Merkel. Several figures in the German economic sector have recently stated that since taking office in May 2025, the current federal government has not addressed the issues facing the German economy. Despite numerous breakthroughs in reforms, the results have not been apparent, with Germany still deeply stuck in stagnation. Economist Michael Hther of the Cologne Institute for Economic Research believes that the current federal government has been slow to act in response to crises in the past year, hesitating in pushing forward necessary reforms and causing doubts. Since last year, the German federal government has mainly hoped to drive economic recovery through massive fiscal plans. However, public opinion generally holds that although the German government has planned special funds and transformation funds of over 100 billion euros, the actual implementation has been hindered by legal restrictions, bureaucracy, and factors such as "diverting budget to plug fiscal holes," resulting in severely inadequate investments flowing into the real economy. The substantial increase in inflation has also offset the effectiveness of fiscal spending. According to calculations from the Cologne Institute for Economic Research, the continually rising interest costs have reduced the flexibility of the budget. Due to the increasing burden of interest, the room for maneuvering in the federal budget is significantly shrinking. Analysts believe that the German government had hoped to bridge part of the fiscal gap with higher tax revenue resulting from a stronger economic recovery. However, according to the latest tax revenue forecasts, the German government's tax revenues in the coming years are expected to be lower than anticipated.