Germany is facing a sharp downturn in its manufacturing sector.

What Happened: New orders for German manufacturing fell by 5.8% month-over-month in August, according to data from the German Destatis. This was a deeper-than-expected decline — much larger than the 2% drop forecasted by Bloomberg economists.

Economists attributed the magnitude of the decline to a robust July marked by large orders.

“One of the reasons for the negative development of new orders in August 2024 were the very large orders for other transport equipment (manufacture of aircraft, ships, trains, military vehicles) placed in the previous month,” the statement read. “When large-scale orders are excluded, new orders in August 2024 were only 3.4% lower than in July 2024.”

German GDP fell by 0.1% in 2024’s second quarter, according to a July statement from Destatis. Investors are pessimistic too — economic sentiment has markedly fallen in the second half of 2024, according to ZEW.

Why it Matters: The data is a worrying sign for German manufacturing’s stability, which could have a ripple effect beyond Europe.

Germany will release industrial production data on Tuesday followed by economic forecasts on Wednesday.

The German economy has struggled since long-time Chancellor Angela Merkel departed from government in 2021. Her successor, the center-left Olaf Scholz, has overseen Germany’s response to the Russian invasion of Ukraine.

The decline comes amid a possible trade war between the European Union and China over electric vehicles.

Car manufacturer Volkswagen AG ( VLKAF )‘s (OTC:VWAGY) faces possible plant closures. The share price of Volkswagen ( VLKAF ) and fellow German automakers Bayerische Motoren Werke ( BAMXF ) AG (OTC:BAMXF) and Mercedes Benz Group ADR (OTC:MBGYY) have struggled mightily in the past year.

The iShares MSCI Germany ETF ( EWG ) , which tracks the German market, is nearly even since 2022. The Europe-tracking Vanguard European Stock Index Fund ETF is up just 2%, paltry compared to the United States SPDR S&P 500 ETF Trust ( SPY )‘s 20% return in that period.

It is possible that Germany’s slowdown can affect U.S. equities. U.S. companies that do business with German firms, or rely on Germany for key components, could face disruptions. Likewise, a weakened European economy may lead to reduced consumer demand for U.S. goods and services, particularly in sectors like luxury goods, travel, and technology.

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