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German factories saw signs of recovery before virus hit

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German factories saw a rebound in demand just before China became engulfed by the coronavirus outbreak that has since spread across the globe.

[FRANKFURT] German factories saw a rebound in demand just before China became engulfed by the coronavirus outbreak that has since spread across the globe.

Orders gained 5.5 per cent in January - the most in more than five years - suggesting that manufacturers were starting to recover from a slump that has lasted more than a year. Since then, numerous companies have reported supply chain disruptions and plummeting export demand as the disease plunges the economy back into despondency.

The euro was little changed after the report and traded at US$1.1234 at 8.32am Frankfurt time.

The global health crisis has already prompted central banks including the US Federal Reserve to slash interest rates, prompting investors to bet that the European Central Bank (ECB) will probably follow suit when it meets next week.

Still, with much of the burden falling on small and medium-sized companies facing cash-flow problems, most ECB watchers expect only a small rate cut at most, with the focus instead on measures to aid lending and calls for governments to add fiscal stimulus.

Germany's Economy Ministry said in Friday's report that bulk orders and catch-up effects after the December holidays bolstered January results. With business confidence stabilising, "manufacturing should have reached the turning point". "Yet it the impact from the new coronavirus risks remains to be seen."

Foreign orders surged, reflecting robust gains across all categories and particularly in investment goods. Domestic demand slipped in January for the first time in three months. Despite the overall strong monthly reading, orders were still down 1.4 per cent from the previous year.

"The surge in Germany's factory orders in January suggests the spectacular industrial weakness recorded at year end was largely transitory. The economy was recovering in early Q1. Now, the coronavirus outbreak will trim GDP growth in Q1 and likely prompt a contraction in Q2," said Bloomberg's economist.

A report on German industrial output in January is due on Monday, along with trade data for the same month. The ECB is scheduled to set monetary policy on Thursday.

BLOOMBERG