Germany's VDMA engineering association raised its 2010 output forecast and now expects production volumes to grow, thanks to a flood of orders from China and emerging markets, its president said.

"Since August 2009...it has been moving upwards in the engineering machinery production from month to month," Manfred Wittenstein told Reuters in an interview on Tuesday. "The German machine and plant engineering sector is apparently recovering from the crisis faster than expected. The VDMA is therefore raising its production output forecast to 3% growth in real terms for 2010," he added.

VDMA previously expected output to stagnate this year compared with 2009, when it fell by about a quarter to €151 billion and capacity utilization dropped to a record low of 69%. The revised guidance comes after new orders for the German engineering sector rose by a record 61% in May, driven mainly by orders from abroad.

Companies such as Siemens, ThyssenKrupp and MAN SE count among the biggest names in the sector, the largest industrial employer in the euro zone's biggest economy and a key pillar that made Germany the world's top exporter until it was unseated by China last year. The IFO think-tank last month raised its 2010 growth forecast for Germany while the government said the economic recovery should strengthen in the second half of the year.

Siemens, Europe's biggest engineering conglomerate, in April revised upward its profit outlook for this year and said last month cost cuts, strong demand from emerging markets and a weak euro should boost its core profit margin in the quarter to end-June.

Boost From Asia

Wittenstein said demand has been strong especially in areas of energy efficiency and electromobility, with emerging markets in Asia building up their infrastructure in these fields. In textile, fluid technology, plastic and rubber technology sectors, a jump of more than 50% in new orders were recorded, he said. Wittenstein said production in the first five months was down 1.3% compared with last year, but the sector grew in April and May for the first time in 15 months.

Wittenstein said the 3% output growth forecast had factored in the likelihood of economic slowdown in the euro zone but not a double-dip recession.

"After May, we expect a slowdown in growth rate of orders for rest of the year," he said. While recent economic data was showing a slowdown in the economy was on the cards, "there was still enough upward swing that allowed us to still raise our forecast to 3%."

The revised forecast had also taken into consideration negative factors, such as the euro zone sovereign debt crisis.

"We are worried about the debt crisis, but we are convinced the euro zone will overcome this and that the euro will stabilize," he said. "I think it is beneficial if the states reduce their deficits, as this will increase our confidence too. We need a long-term stable relationship. We cannot do our business with checks bouncing around."

He said total average sector employment was expected to be at 900,000 this year, down from last year's 939,000. Speaking to Reuters Insider TV, Wittenstein said a strengthening of China's currency will help raise wages there, which in turn will help increase consumption in China. "This means that it will be easier for price sensitive products to be sold in China," Wittenstein told Insider.