Time to wrap up. Here’s the main points.

Britain’s fiscal watchdog has warned that the pandemic, the climate crisis and the UK national debt’s exposure to higher interest rates are all “large and potentially catastrophic sources of fiscal risks”.

In its latest assessment of the risks facing the UK economy, the Office for Budget Responsibility showed that early action on getting to net zero by 2050 would add 21% of GDP to the national debt -- while only acting late would be twice as costly.

The OBR showed that the government face a £10bn spending black hole, with health, education and transport all needing more help.

And the Treasury watchdog also warned that advanced economies may be increasingly exposed to large, and potentially catastrophic, risks, after two ‘once in a century’ shocks in two decades.

Growth across the US service sector has slowed, as firms report problems obtaining raw materials and hiring staff.

German factory orders fell unexpectedly in May, as supply shortages also hit business.

German manufacturing orders fell by 3.7% in May, new figures from the Federal Statistics Office show -- dragged down by a slump in overseas orders, and less demand for heavy duty machinery.

UK builders have been hit by mounting price pressures and delays caused by a shortage of materials and finished goods, undermining a jump in business.

Rapid growth boosted employment in the construction sector – which accounts for about 6% of the economy – but 77% of firms reported longer lead times from suppliers, while prices for products and raw materials rose at their fastest rate since the survey was launched.

Oil has fallen back from multiyear highs, on speculation that the Opec+ production cuts deal could collapse after members failed to agree limited increases to supplies.

The US service sector slowdown seemed to push the market lower. Shares have fallen in New York, where the S&P 500 is down 0.75%, and in London, where the blue-chip FTSE 100 lost 0.9%.

China’s ride-hire firm Didi plunged by a quarter, after regulators launched an investigation and ordered its removal from app sites.

Supermarket chain Sainsbury has warned of gaps on shelves as supplies of some products including salads, beers and soft drinks run low because of shortages of lorry drivers and an uptick in staff forced to self-isolate because of covid-19.

Vauxhall owner Stellantis has announced that it will invest £100m to build electric cars and vans at Ellesmere Port, in Cheshire, in a move that will make it the first large plant in the UK dedicated exclusively to electric vehicles.

Ocado, the online grocer, has reported a 20% increase in retail sales and hailed a permanent shift in grocery shopping in the Covid-19 pandemic.

Goodnight. GW

Back in London, the FTSE 100 index has closed 64 points lower at 7100, down 0.9%.

Energy stocks, mining companies and financial stocks were the worst performing sectors, with consumer cyclicals also lower.

Copper producer Antofagasta (-4.5%) was the top faller, with oil giant BP (-4.1%), steelmaker Evraz (-4%), commercial property firm British Land (-4%), manufacturing group Melrose (-3.6%), Barclays bank (-3.5%) and commodities giant Glencore (-3.1%) also in the fallers.

Ocado fell 4.2%, despite posting a 20% rise in retail revenues and a new contract in Spain.

The New York stock market is showing losses, as investors move into US government bonds, and major tech stocks.

The S&P 500 index, which covers a broad swathe of the US market, is down 0.5% at 4,328 points, away from its latest record high.

And the the Dow Jones industrial average has lost 325 points, or almost 1%, to 34,460.

Most of the 30 stocks on the DJIA are down, led by chemicals firm Dow Inc (-2.7%), construction machinery maker Caterpillar (-2.25%), and entertainment firm Walt Disney (-2.1%).

Oil stocks are also lower, with the slide in crude hitting the sector.

But some tech stocks are higher, with Apple (+1.2%) and Amazon (+3.4%), bucking the trend.

And government bond yields are also falling, indicating that investors are less worried about rising inflation leading to a pick-up in interest rates.

The oil price has now fallen sharply as investors fret about Opec+’s failure to reach a supply deal.

US crude, which reached its highest level since 2014 this morning, is now down 2% at $73.50 per barrel, while Brent crude is down 3% at $74.68, away from near three-year highs.

The clash between Saudi Arabia and the United Arab Emirates thwarted plans to gradually raise oil output from August to December. In the short term, that means production remains curbed at current levels beyond July -- leaving the market in limbo, just when global demand is increasing.

Neil Wilson of Markets.com says traders are concerned that Opec+’s production cuts deal, which is keeping the market tight, could unravel:

Oil has retreated sharply in the wake of the post-OPEC spike. It looks like the market is more worried about a potential crisis at the cartel than it likes the lack of fresh supply coming on in H2. WTI tests the 200-hour SMA at $74 where it finding a little support.

A break could see $72. Traders seem concerned that the speculative positioning could be unwound in the coming days if the OPEC+ deal were to start to unravel, ultimately leading to more crude and a less stable oil market.

Growth across the US service sector slowed last month as shortages of raw material and labor hit the economy.

The Institute for Supply Management says its non-manufacturing activity index fell to 60.1 last month from a record high of 64.0 in May.

This shows the 13th straight month of growth in a row, but is weaker than expected - suggesting that supply chain problems are holding back the recovery.

Production and new orders rose at a slower rate, while the employment index shows a contraction, and backlogs of orders grew.

Anthony Nieves, chair of the ISM’s services business survey committee, explains:

The rate of expansion in the services sector remains strong, despite the slight pullback in the rate of growth from the previous month’s all-time high.

Challenges with materials shortages, inflation, logistics and employment resources continue to be an impediment to business conditions,”.

The drop in the ISM services index in June suggests that shortages and price increases are becoming an increasing drag on hiring and economic activity, says Michael Pearce, Senior US Economist at Capital Economics.

The ISM also produces a round-up of views from company managers, which show that supply chain problems are causing problems.

• “Our restaurants are quickly — maybe too quickly — returning to 2019 sales levels. Strong consumer demand for dining out is clearly evident as COVID-19 restrictions ease, but the challenges are supply chain outages, logistics delays and employee- and management-staffing constraints. Some locations cannot open for business or (have) limited hours, as we cannot staff the restaurant to meet consumer demand.” [Accommodation & Food Services]
• “Severe supply chain disruptions and inflation are continuing in the marketplace, in all sectors.” [Arts, Entertainment & Recreation]
• “COVID-19 continues to cause troubles for all of our deliveries, as well as short supply a lot of materials. (Shortages of) lumber, copper, and steel continue, which is driving up pricing and lead times.” [Construction]
• “The declining positive test rates for COVID-19 is already having a significant impact, as virtually all aspects of our operations are picking up rapidly. The summer is normally the slow period, as limited teaching is taking place, but this year, preparations for the fall semester are already underway.” [Educational Services]
• “New business is actively trending up locally, nationally and internationally.” [Finance & Insurance]
• “We continue to see a high (patient) census as COVID-19 restrictions are eased, but the volumes are not pandemic related. There are more patients now because they wouldn’t or couldn’t get treatment because of restrictions on (non-COVID-19) care or personal cautiousness.” [Health Care & Social Assistance]
• “Employees globally are returning to the office where possible. We expect to have most employees in the office starting in September.” [Information]
• “Business conditions continue to rebound; however, like everywhere, the challenges in the supply chain are numerous. We continue to see cost increases, delayed shipments, pushed-out lead times, and no clarity as to when predictive balance returns to this market.” [Retail Trade]
• “Labor market remains tight, and wages have risen at an unprecedented rate. We are expecting a long-term effect on pricing of services.” [Transportation & Warehousing]
• “Overall business activity in the month has been strong. We are seeing increased orders and slight improvements in backlogs. The primary headwinds this month continue to be very expensive ocean freight rates, increasing business costs and increasing raw-materials costs. The top line is not outrunning expenses.” [Wholesale Trade]
• “Starting to see a lot of commodity-price increases for chemicals, acidizing and cementing. This is driven by product cost increases stemming from low production from plants.” [Mining]

The value of Didi, the China ride-hailing company, has plunged by over a fifth after Beijing’s cyberspace regulators announced a crackdown against the company

Didi slumped by around 22% in early Wall Street trading to around $12, below the $14 at which it raised $4.4bn in its IPO just last week.

The selloff came after the Cyberspace Administration of China ordered smartphone app stores to pull Didi Global Inc’s app after it alleged the ride-hailing company had “illegally collected users’ personal data”.

The CAC urged Didi to:

“earnestly rectify and reform existing problems, and to conscientiously ensure the personal information security of the numerous users”.

In response, Didi said it had stopped registering new users and would remove its app from app stores - warning in a separate statement to investors that it expected the app takedown may have an “adverse impact” on its revenue in China.

Wall Street had been closed yesterday, so this is traders’ first chance to react:

CAC had already launched an investigation into the ride-hailing company on Friday to “safeguard national data security, maintain national security and protect public interest” .

Our China affairs correspondent Vincent Ni explains:

Some observers believe the move against Didi is part of a continuing crackdown by the Chinese authorities on what was once a loosely regulated technology sector. It follows government actions in recent months aimed at the online marketplace Alibaba, and social networks Tencent and Bytedance, the parent company of TikTok.

The government has also been ramping up its efforts to safeguard the nation’s data security and cybersecurity. In April, a dozen government agencies issued cybersecurity review measures, requiring critical information infrastructure operators to conduct network security reviews for technology products and services they procure that are relevant to national security or have the potential to be.

Deutsche Bank have warned that the balance of risks facing the global economy is slightly more negative.

In its latest House View, Deutsche says that recent weeks have seen the global recovery motor along as expected, supported by the vaccine rollouts and a further easing of restrictions.

But the balance of risks has deteriorated slightly, they say, due to the continued global reach of the delta variant and the market wobble last month when US Federal Reserve officials predicted two interest rate rises in 2023 to address inflation.

Although Wall Street hit record highs last week, Deutsche strategists continue to expect a 6-10% correction in US equities this summer given that growth indicators are peaking.

And Covid-19 will remain in the spotlight, they add, particularly as the global decline in cases since late-April has now stalled and the more-infectious Delta variant has emerged.

With vaccination rollouts now in an advanced phase across many developed countries, one of the biggest questions soon will be the extent to which governments and citizens are prepared to live with the virus.

That answer will have crucial implications for the shape of the recovery and the new steady-state we’re heading to. Watch the U.K. if it fully lifts restrictions in two weeks, with still high case numbers, for clues to the global picture.

In another step in the UK’s long journey to net zero, Vauxhall owner Stellantis has announced that it will invest £100m to build electric cars and vans at Ellesmere Port, in Cheshire.

My colleague Jasper Jolly explains:

The move will make it the first large plant in the UK dedicated exclusively to electric vehicles.

It will build four electric vans and their passenger car equivalents at the UK factory under Stellantis’s Vauxhall, Opel, Peugeot and Citroën brands, replacing the Astra family car which will be built in Germany instead.

The decision will secure the jobs of 1,000 workers at Ellesmere Port as well as an estimated 3,000 in the supply chain.

The investment will be welcomed across the UK car industry, which has suffered from years of uncertainty over foreign owners’ investment plans since the Brexit vote in 2016. It is the second significant investment into the UK car industry in a week, after Nissan said it would pour £1bn into electric car and battery production in Sunderland.

The UK-EU trade deal that came into force at the start of the year has allowed companies to put in place longer-term plans to invest in new electric technology, despite the ongoing production difficulties caused by the coronavirus pandemic.

Stellantis will install new equipment to assemble battery packs at Ellesmere Port. However, the plant will source the cells that make up batteries from EU plants owned by ACC, a joint venture between Stellantis and French oil company Total. British-made vehicles with batteries sourced from the UK or EU will not face export tariffs when sold in European markets under the Brexit deal.

Stellantis would consider sourcing from the UK in future if so-called gigafactories – large battery factories – are established.

Here’s the full story:

Rishi Sunak will need to spend an additional £10bn each year on public services to deal with the continuing fallout from the Covid-19 pandemic after this year, the Treasury’s tax and spending watchdog has said.

The Office for Budget Responsibility (OBR) said the chancellor faced unfunded spending commitments across three vital government departments over the coming three years from the lasting effects of the pandemic.

It comes as Boris Johnson’s government warns the public that Britain must “learn to live” with the pandemic as risks to public health remain and the prospect of another difficult winter for the health service looms despite swift progress with the Covid vaccination programme.

In its fiscal risks report, the OBR said the chancellor faced significant headwinds, with the pandemic increasingly likely to leave a legacy of heightened funding pressures for public services after 2021.

It said pressure on health budgets could be about £7bn a year above current spending plans, due to the need to pay for a continuing test-and-trace programme, revaccinations and the health impact of the pandemic.

The funds would also be needed to deal with potential future outbreaks of the disease, as well as handling the growing backlog of routine treatments that were put on hold by the crisis.

Other ongoing pressures the government has not budgeted for include £1.25bn of catchup funding for education, as well as £2bn a year to fill holes in fare revenues for the national railway network and Transport for London...

The fiscal cost of achieving net zero by 2050 will be twice as high if the UK government delays taking action until 2030, rather than acting fast now, the UK’s fiscal watchdog says.

The Office for Budget Responsibility’s fiscal risks report shows taking early action to decarbonise the economy has a smaller net impact on the UK’s finances than Covid-19 or the 2008 financial crisis.

But delaying until the start of the next decade will end up adding twice as much to the national debt as acting fast.

And failing to take action has a catastrophic impact on the public finances (and, rather more importantly, the planet), with debt rocketing to 289% of GDP by the end of the century, up from about 100% now.

The UK’s Climate Change Committee (CCC) puts the cumulative investment cost for the whole economy between now and 2050, plus the operating costs of emissions removals, at £1.4trn in 2019 prices, the report says.

The Government has not said how much of that cost it expects to bear -- but the OBR assumes it meets a quarter of it. When combined with savings from more energy-efficient buildings and vehicles, the net cost to the state is £344bn in real terms. Spread across three decades, that’s an average of just 0.4% of GDP in additional public spending each year.

Speaking at today’s press conference, OBR chairman Richard Hughes explains that the watchdog has drawn up an ‘early action’ scenario, in which the UK ramps up carbon taxes and also boosts investment in green technologies from the mid-2020s.

In that scenario, making the transition to net zero by 2050 adds about 20% of GDP to government debt over the next 30 years, slightly less than the pandemic is expected to add in just two years, Hughes says.

The bulk of the cost comes from the loss of fuel duty, followed by government support for investments in zero carbon technology - which are only partly offset by taxing carbon more heavily.

The report says:

Carbon tax revenues. Our [early action] scenario assumes all emissions are taxed, and more heavily, from 2026-27 onwards (which could be achieved by extending the UK ETS [emissions trading system] or imposing a uniform carbon tax in its place).

But, this is only one scenario for reaching net zero, and arguably ‘quite an optimistic one’ Hughes admits, in which governments around the world act decisively this decade to put their emissions on a steeply declining path.

So the OBR has modelled alternative scenarios - varying the timing of the transition, impact on productivity, and fiscal policy choices.

One scenario actually saves the government money -- if the investment costs are funded within existing spending plans (meaning a very tight squeeze on other public services), and the loss of fuel duty is replaced by another tax on motoring, such as a road user charge.

But under the ‘late action’ scenario, decisive steps to cut emissions globally and in the UK are delayed until the 2030s. Then, the UK must manage a more hurried and costly transition to net-zero - and misses out on five years of carbon tax revenues.

Under this scenario, debt in 2050-51 is 23 % of GDP higher than in the early action scenario, with GDP around 3% lower and direct public spending costs increasing by around a half.

Hughes says:

The price of this delay is a doubling of the total fiscal cost of the transition.

Hughes also points out that in some sectors of the economy, such as transport, decarbonisation pays for itself as improvements in battery technology drive the lifetime cost of electric cars below the cost of petrol cars.

But other areas have significant net costs, such as replacing household gas boilers with green alternatives, which society would have to bear.

The net cost to the government depends on revenues changes - net zero provides threats and opportunities. At risk are the revenues collected from petrol duty - which are almost certain to disappear once fossil-fuel cars are banned by 2030.

But, this can be partly made up for with a carbon tax (although the revenues here would decline as the economy shifted to net zero).

Here are more key charts from the report:

And here’s some reaction:

The OBR warns that the UK faces a £10bn per year shortfall in spending on health, education and transport following the pandemic.

These “potential unfunded legacy costs of the pandemic” represent a material risk to the public spending outlook, the fiscal watchdog warns.

The Fiscal Risks report says:

Departmental spending plans make no provision for virus-related spending beyond this financial year. Instead, spending totals from 2022-23 onwards were cut by £14½ billion a year in Spending Review 2020 and the 2021 March Budget relative to the sustained rises in departmental spending planned pre-pandemic.

At the same time, overall public spending is still forecast to be higher as a share of GDP in the medium term than it was pre-pandemic.

Chancellor Rishi Sunak could redirect spending from other areas to address pandemic costs (causing a further squeeze there) or he could increase total spending - meaning further tax rises or increased borrowing, the OBR adds.

And it identifies three key areas where the pandemic could leave £10bn per year in spending pressures:

• Health. Pressures on health budgets could be around £7 billion a year from the potential need to pay for: standing test and trace and revaccination programmes; the consequences of the pandemic for individuals’ physical and mental health; additional spare capacity to cope with possible future outbreaks; and the pandemic-related backlog of treatments.
  
  
• Education. Schools may require around £1¼ billion a year to enable pupils to catch up on the estimated two to three months of education that they have lost on average during the pandemic, in addition to the £1.4 billion that has been committed since the Budget, with the intention of reviewing the case for further funding in the Spending Review.
  
  
• Transport. Around £2 billion a year may be needed to fill a 10 to 25 per cent hole in the fare revenues of the new Great British Railways and Transport for London (TfL) if passenger numbers do not return to pre-pandemic levels. The Government has already provided £12.8 billion of direct support to the railways and TfL in 2020-21. However, as of June 2021, passenger numbers on national rail and the London Underground were still down a half on pre-pandemic levels.

The arrival of two ‘once in a century’ events since 2000 suggests that the risks facing advance economies are rising, the UK’s Office for Budget Responsibility warns.

That includes extreme weather, pandemics, and cyber attacks, they say, in today’s Fiscal Risks report:

The arrival of two major economic shocks in quick succession need not constitute a trend, but there are reasons to believe that advanced economies may be increasingly exposed to large, and potentially catastrophic, risks. While the threat of armed conflict between states appears to have diminished in this century, the past twenty years have seen an increase in the frequency, severity, and cost of other major risk events, from extreme weather events to infectious disease outbreaks to cyberattacks.

And estimates from major insurers and others of the amount of global GDP at risk from these and other potentially catastrophic risks have been rising steadily. This appears to reflect a combination of the increased frequency and severity of some anthropogenic risks (such as climate change and cyberattacks), growing numbers of people living and working in greater proximity to the sources of those risks (such as floodplains and isolated ecosystems), and deepening global interconnectedness (through travel, trade, finance, and the internet).

And this is a threat to government finances - as they step in if the private sector fails to handle these risks:

As countries’ exposure to large, and potentially catastrophic, risks increases, so do the associated risks to their public finances. This is because such risks are not only more disruptive to the economies that generate governments’ revenues but also because they are more likely to overwhelm private risk management and insurance mechanisms, prompting governments to step in as insurer of last resort.

This may be particularly true in an era when economic shocks are more severe, financial institutions and firms are more leveraged, and monetary policy is more constrained.

Britain’s Office for Budget Responsibility has published its report into the fiscal risks facing the UK public finances, and their long-term fiscal sustainability.

And it warns that the UK faces three “large, and potentially catastrophic, sources of fiscal risks” - the pandemic, the climate crisis, and the UK’s public debt (which is now over £2trn, or around 100% of GDP), and its exposure to higher interest rates (as flagged earlier).

The OBR says that the UK is emerging from its “largest peacetime economic and fiscal shock in three centuries” -- the second ‘once in a century’ shock in two decades (after the financial crisis of 2008).

After the second ‘once in a century’ shock in just two decades, our third Fiscal risks report focuses on three large, and potentially catastrophic, sources of fiscal risks. The pandemic could leave £10 billion per year in spending pressures and long-term economic scars.

While unmitigated climate change would spell disaster, the net fiscal costs of moving to net zero emissions by 2050 could be comparatively modest.

While interest rates touched historical lows during the pandemic, the public finances are increasingly exposed to future rate rises due to a higher debt stock and a shortening of its effective maturity.

The OBR explains:

Just two decades into this century, the UK has already experienced two ‘once in a century’ economic shocks – the 2008 financial crisis and the 2020 coronavirus pandemic.

These two shocks triggered the two largest post-war recessions, accounted for successive peacetime government borrowing records, and added over £1 trillion (50 per cent of GDP) to public debt – taking it above 100 per cent of GDP for the first time since 1960. While these shocks have very different origins, impacts, and likely legacies, both offer a stark reminder of the importance of understanding risk to effective fiscal forecasting and policymaking.

The coronavirus pandemic, climate change, and the cost of government debt are all potentially very large fiscal risks, the OBR adds -- very different in nature, but with some important features in common.

There is a high degree of uncertainty concerning both their timing and associated costs. They are characterised by non-linearities or ‘snowball effects’ in which costs can escalate dramatically from the point of crystallisation.

And they are global in nature, with the potential for rapid contagion across countries. Governments seeking to manage these threats must thus weigh the known costs of early action to mitigate these risks against the uncertain costs of dealing with the fallout when they crystallise. They must also weigh the limited but more deliverable benefits of acting unilaterally against the greater but more elusive gains from acting globally.

More to follow....

Britain’s construction industry has posted its fastest growth in 24 years last month, led by a jump in demand for new homes and commercial property.

But builders were also hit by supply chain delays and inflationary pressures, with raw materials rising at a record pace.

That’s according to the IHS Markit/CIPS construction PMI, which has jumped to 66.3 in June from 64.2 in May, the highest since June 1997.

Tim Moore, Economics Director at IHS Markit, explains:

“June data signalled another rapid increase in UK construction output as housing, commercial and civil engineering activity all expanded at a brisk pace. The headline index signalled the fastest rise in business activity across the construction sector for 24 years. Total new orders expanded at one of the strongest rates since the summer of 2007, mostly reflecting robust demand for residential projects and a boost to commercial work from the reopening UK economy.

Supply chains once again struggled to keep up with demand for construction products and materials, with lead times lengthening to the greatest extent since the survey began in April 1997. Survey respondents widely reported delays due to low stocks of building materials, shortages of transport capacity and long wait times for items sourced from abroad.

“Purchasing prices and sub-contractor charges both increased at a survey-record pace in June, fuelled by supply shortages across the construction sector. Escalating cost pressures and concerns about labour availability appear to have constrained business optimism at some building firms. The degree of positive sentiment towards the yearahead growth outlook remained high, but eased to its lowest since the start of 202

US crude oil has hit its highest level in over six years, after the Opec+ group failed to agree a plan to lift production yesterday.

US crude, or WTI, hit $76.98 per barrel this morning, its highest since November 2014.

The group of oil producing countries had aimed to continue easing their production cuts over the rest of 2021, adding another 400,000 barrels per day each month from August to December, and to also extend their remaining output curbs until the end of 2022.

But OPEC+ ministers called off oil output talks on Monday, with reports that the United Arab Emirates had rejected the extension - unless its baseline for production was lifted (allowing it to pump more within the agreement).

If a deal can’t be reached, the Organization of Petroleum Exporting Countries and its allies won’t increase production for August -- meaning tighter supplies, just as demand is increasing.

Brent crude, the international benchmark, is at its highest since 2018, hitting $77.84 per barrel.

Richard Hughes, head of the Office for Budget Responsibility, has spoken on Radio 4’s Today Programme, ahead of the OBR’s fiscal risks report at 9.30am.

Asked about the threat of rising inflation, Hughes argued that it will be temporary.

“Our own forecast expects that the inflation increase that we see to be a temporary phenomenon driven by an adjustment to the economy back to its normal levels of activity, and we don’t expect that to persist over the long term - but actually inflation to return to its longer-run target of 2%.

Hughes adds, though, that the UK’s debt stock is increasingly exposed to shocks from inflation and interest.

That’s because it’s much larger than before, at over 100% of GDP, and also because its average maturity is shorter - meaning it adjusts faster to change in interest rates (as old debt matures, and new bonds are issued).

Plus, more inflation-linked debt has been issued, and its cost goes up automatically with a rise in inflation.

And that means it is harder and harder for government to use inflation as a way of getting rid of their debt stocks, Hughes adds.

Hughes was also asked about the cost of the pensions triple lock - which guarantees that pensions rise by average wages, inflation or 2.5%.

Hughes explains that one of the anomalies of the coronavirus shock is that earnings growth was suppressed when many people were out of work, but is now “coming roaring back”. Wage growth hit 5% in recent months, and the Bank of England and others predict it could reach 8% in the three months to July.

That could trigger an increase in the cost of the triple lock - costing the government £3bn more a year from here on, Hughes says.

Good morning and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

German factories have suffered their steepest fall in orders since the first lockdown, in a sign that the global recovery is uneven as supply problems hit economies.

German manufacturing orders fell by 3.7% in May, new figures from the Federal Statistics Office show -- dragged down by a slump in overseas orders, and less demand for heavy duty machinery.

It’s the first drop in new business this year -- at a time when Germany’s economy seemed to be rebounding strongly from the pandemic.

Economists surveyed by Reuters had forecast of a 1% rise, and May’s fall comes after an upwardly revised increase of 1.2% in April.

Although domestic orders increased by 0.9% during the month, foreign orders slumped by 6.7%, with orders from beyond the eurozone sliding by 9.3%.

Manufacturers of intermediate goods (used to make final products) saw new orders fall by 3.6%, while capital goods makers saw demand slide 4.6% - although consumer goods demand was stronger, up 3.9%.

Germany’s car sector - so often a growth driver - had a bad month, suggesting that the global shortage of key parts such as semiconductors is continuing to cause ructions.

Bloomberg explains:

Orders fell 3.7%, worse than all estimates in a Bloomberg survey. The Economy Ministry said the slump was driven by weak export demand for cars following a steep rise the previous month. Domestic orders rose 0.9%.

German companies are battling with unprecedented supply-chain problems as a result of a sudden surge in global activity following the end of coronavirus lockdowns, a trend which is also driving up prices amid competition for inputs and raw materials. While some of those bottlenecks may have started to ease, it’s likely to take time for disruptions to pass.

Oliver Rakau of Oxford Economics says global supply shortages played a key role in the drop in orders:

Also coming up today

Oil continues to hit its highest levels since 2018, after the Opec+ group failed to agree a new plan to ease its production cuts beyond this month.

Brent crude is up 0.4% at $77.46 per barrel, the highest since late 2018, as traders anticipate tighter supplies.

The UK’s fiscal watchdog, the Office for Budget Responsibility, is publishing a new report on the fiscal risks facing the UK.

The report will include analysis of the “unprecedented economic and fiscal shock” of the Covid-19 pandemic -- covering the government’s fiscal support, the ‘legacy risks’ they may pose to the public finances and the economy. It will also examine what lessons can be learned for “understanding and managing other catastrophic fiscal risks”.

It will also consider climate change -- and the potential economic and fiscal consequences of unmitigated climate change relative to a world in which the Paris targets for limiting global warming are met; approaches to decarbonising the UK economy; and different scenarios for meeting the Government’s target for net zero emissions from the UK economy by 2050.

The report will also examine the UK public debt - which hit £2trn for the first time under the pandemic - looking at the historic drivers of debt levels and interest rates; potential scenarios for the future path of interest rates; and their implications for long-run fiscal sustainability.

The owner of car brand Vauxhall is expected to announce plans to build electric vans at its Ellesmere Port plant in Cheshire, safeguarding more than 1,000 factory jobs.

Stellantis, formed this year by the merger of Peugeot and Chrysler, has decided to invest in switching the plant from producing the Astra to a new model of electric van.

Stellantis has held talks with the UK government over financial support for further investment in the factory, as my colleague Gwyn Topham explained last week:

The exact government support is unlikely to be disclosed, but could run to around 10% of the total investment, which is believed to be between £300m and £400m. The Stellantis announcement will follow news this week that Nissan is to build a £1bn battery gigafactory in Sunderland, believed to be with a subsidy package from the UK taxpayer of around £100m.

We also find out how UK and eurozone builders fared last month, with the latest construction PMIs

The agenda

• 7am BST: German factory orders for May
• 8.30am BST: Eurozone construction PMI for June
• 9.30am BST: UK construction PMI for June
• 9.30am BST: Office for Budget Responsibility publishes
• 10am BST: ZEW survey of German economic sentiment
• 3pm: US services PMI survey for June