The recovery of the automotive industry drives Germany's factory orders to rebound by 4.4% in September; ECB December rate hike expectations further strengthened

According to Zhitong Finance APP, German factory orders saw a certain degree of rebound driven by a recovery in the automotive sector, indicating that Europe’s largest economy still demonstrates resilience amidst a turbulent global macroeconomic environment. In September, factory order demand grew by 4.4% month-on-month, compared to a drop the previous month which was the largest decline since January. However, the September orders data was slightly below economists’ earlier consensus forecast of 4.5% growth.

Germany’s economy grew by 0.2% in the third quarter, outpacing expectations, and the German central bank expects the growth momentum to “significantly” strengthen going forward. Public spending has played a key role, but it has also caused volatility in the monthly data.

September orders were buoyed by a rebound in the automotive industry and increased machinery demand. Excluding large-scale factory orders, the overall month-on-month increase was 5.1%. For the third quarter as a whole, orders grew by just 0.2%.

The rebound in orders provides a positive signal for the outlook of future industrial production. However, for the industrial production data for September, which is yet to be published, economists expect that after strong growth in August, output may see a slight decline.

This report overall releases a positive signal for industrial production. Previously, economists were nearly unanimous in expecting that after strong growth in August, September’s industrial production data might see a slight decrease.

Business confidence has also picked up, making analysts more optimistic that the projected 1% economic growth for this year will further accelerate in 2027.

However, investors still have reasons to remain cautious. Automobile manufacturers are struggling to cope with high costs and competition from China. This week, global automotive and industrial supplier Schaeffler announced plans to close five factories in Europe, four of which are in Germany, and to cut nearly 3,500 jobs, adding to thousands of layoffs previously announced across the industry.

German Chancellor Friedrich Merz, during his visit to Asia last week, called for strengthening ties between Asia and the EU as both sides face pressure from China. Merz’s stance on trade with China has become increasingly tough, and he recently reached a consensus with French President Emmanuel Macron to pave the way for the EU to adopt tougher trade tools.

The most positive signal from this German factory orders report is that even after excluding large orders, growth still reached 5.1%, indicating a certain breadth in the rebound; however, overall growth for the third quarter was only 0.2%, mainly reflecting a recovery after prior declines. Public spending can supplement demand but cannot directly eliminate the cost disadvantages and competitive pressures faced by Germany’s automotive sector.

German factory orders rebounded by 4.4% month-on-month in September, with renewed demand in the automotive and machinery sectors combined with 0.2% economic growth in the third quarter, showing that Europe’s largest economy still has resilience for recovery. But quarterly orders grew by just 0.2%, and plant closures and layoffs in the automotive industry continue, demonstrating that both fiscal support and industry structural adjustments are taking place simultaneously. What the market is currently pricing in is whether this industrial recovery can withstand the squeeze from rising energy costs and interest rates.

Only when orders are translated into deliveries, capacity utilization rises, and profit margins improve, can a more solid foundation for industrial stocks’ rally be established. At the same time, resilient growth alleviates the European Central Bank’s concerns over economic downturn, while a rebound in inflation constrains room for easing, so improvements in industrial profitability and pressure on bond yields can occur simultaneously, and European assets may not see a synchronized rally.

The inflation trajectory across Europe shows clear divergence: Germany’s Harmonised Index of Consumer Prices (HICP) in October slowed from a year-on-year increase of 3.3% to 2.8%, with core inflation dropping from 2.5% to 2.3%; however, overall eurozone inflation rose to 4.0% in October from 3.2% in August and 3.8% in September, with energy prices jumping 20.8% year-on-year, service inflation rising to 3.3%, and core inflation holding at 2.5%. The cooling of prices in Germany is not yet sufficient to alter the inflationary pressures facing the eurozone as a whole.

Commerzbank economist Ralph Solveen noted that temporary fuel tax reductions have helped German inflation ease, but this trend is unlikely to continue and inflation could soon rise again. The European Central Bank maintained its deposit facility rate at 2.50% on October 29; as of November 4, another rate hike in December has become the mainstream market expectation, and financial markets are pricing in two to three hikes over the coming year. The logic underlying market pricing for the European Central Bank’s policy path is: the longer the energy shock persists, the more likely companies are to pass on costs to goods and services, thereby affecting wages and inflation expectations.