By Michael Nienaber
BERLIN (Reuters) - Weaker domestic demand caused a plunge in German engineering orders in July while growth in manufacturing slowed slightly in August, data showed on Thursday, suggesting factories in Europe's biggest economy are facing headwinds.
The latest figures reflected growing concern that the German economy is set for an economic slowdown, after its surprisingly strong performance in the first half of the year, as domestic demand fails to offset an increasing malaise in exports.
The IWH economic institute said on Thursday German growth would pick up to 1.9 percent this year from 1.7 percent in 2015 due to higher household and state spending, but it would slow to 1.2 percent in 2017 as weaker exports are expected to hit manufacturers.
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Germany's VDMA industry association said engineering orders dropped by 19 percent in real terms from the previous year in July. Domestic orders dropped by 34 percent while bookings from abroad fell by 9 percent.
VDMA chief economist Ralph Wiechers attributed the steep drop mainly to an unusually strong rise in domestic orders for large industrial plants in July 2015.
But engineering orders also fell in the less volatile three-month comparison. Between May and July, they were down by 7 percent on the year, with domestic demand falling by 11 percent and foreign orders slipping by 4 percent.
"Overall we feel that there is uncertainty in many export markets about future economic developments," Wiechers said.
The engineering data came after a survey among purchasing managers showed activity in the manufacturing sector slowed slightly in August, while remaining solid overall.
Markit's Purchasing Managers' Index (PMI) for manufacturing, which accounts for about a fifth of the German economy, edged down to 53.6 in August from 53.8 in July.
That was in line with a flash reading and well above the 50 line that separates growth from contraction.
"Although the PMI had edged down slightly since July, today's survey results highlight that Germany's goods-producing sector remains generally in good shape," Markit economist Oliver Kolodseike said.
The survey figures for production and new business were among the strongest seen in the past two years, with foreign demand rising sharply, Kolodseike added.
The overall solid reading provided some welcome news after last week's Ifo index showed that business morale deteriorated in August, with Britain's vote in June to leave the European Union depressing sentiment among German executives.
Economists are divided on how much Britain's vote to leave the EU will weaken German exports and consequently lower growth rates in the coming quarters.
The DIW economic institute expects economic growth to slow to 0.3 percent in the third quarter from 0.4 percent in the three months to June, partly because of Brexit. Other analysts have said Germany's vibrant domestic economy forecast could underpin growth of 0.5 percent in the third quarter.
For 2016 as a whole, the central bank and the government both expect rising private consumption and higher state spending to drive an overall rate of expansion of 1.7 percent.
(Reporting by Michael Nienaber; Editing by Alison Williams)