German factory orders drop after mounting supply shortages

German manufacturers unexpectedly saw demand decline in April, signaling that supply shortages and higher prices are undercutting the country’s economic recovery.

Orders fell 0.2%, missing a median estimate for a 0.5% gain. The Economy Ministry said weakness was driven in particular by lower domestic demand. Foreign orders were up 2.7% from the previous month.

Manufacturing has been a stronghold in Europe’s largest economy over the past months, benefiting from earlier recoveries in places such as China and the U.S. Lately though, businesses have run into unprecedented supply-chain issues amid shortages of parts and raw materials.

Those bottlenecks were chiefly responsible for a slowdown in manufacturing momentum in May, according to a separate gauge published last week by IHS Markit. At the same time, services rebounded as Germany started to loosen pandemic restrictions on businesses in hospitality and recreation after more than seven months of lockdowns.

The German government predicts the economy will grow 3.5% this year, even after a slump of nearly 2% in the first quarter. At the European Central Bank, policy makers expect that the higher pace of vaccinations and a gradual economic reopening will put the wider euro region on track for a strong recovery in the second half of the year.