German manufacturing orders increased 1.9% in May versus April on a seasonally and calendar-adjusted basis, while the rise was 1.0% when large orders were excluded. Economists surveyed beforehand had pencilled in an increase of just over 1%, and the May readings were presented by Commerzbank as consistent with an upward trend in order intake.
Commerzbank expects the improvement in orders to translate into a moderate recovery in German industry, after an extended period of stagnation. It also forecasts a slight recovery in the wider economy following what it expects was a small decline in Q2, while keeping its 2026 full-year growth forecast at 0.6%.
Signs Of Gradual Industrial Recovery
Based on the surprisingly strong 1.9% rise in German manufacturing orders for May, we see early signs of a gradual industrial recovery. This upward trend suggests the economic floor is firming up, even if a strong rebound is not expected. This follows a long period of stagnation and points toward a slow improvement in the second half of the year.
This view is supported by the latest data released in late June. The Ifo Business Climate Index, a key measure of corporate sentiment, edged up to 90.1, its third consecutive monthly rise. This reinforces the idea that businesses are cautiously looking past the recent economic weakness and geopolitical tensions from the Iran conflict.
However, industrial production figures for May, which came in at a modest 0.5% increase, show that turning orders into output is a slow process. We believe this confirms the recovery will be gradual rather than sharp. The German economy is still navigating significant headwinds that will likely cap any major rally.
Inflation, Headwinds, And Market Positioning
Inflation also remains a concern, with the flash estimate for June’s CPI holding firm at 2.8%. This persistent price pressure could limit the European Central Bank’s ability to provide further economic support, creating a ceiling for growth. Historically, periods of sticky inflation have often tempered equity market performance even during mild recoveries.
Given this outlook, we are positioning for limited upside in German equities over the coming weeks. We believe selling out-of-the-money call options on the DAX index is a prudent strategy to generate income while acknowledging the cap on a major rally. This also allows traders to take advantage of a market that is recovering but unlikely to break out significantly.
The potential for a fragile recovery means downside risks have not disappeared. We see value in purchasing put options on key industrial stocks as a hedge against any unexpected negative data or a reversal in sentiment. This provides protection should the anticipated moderate recovery fail to materialize as expected.
