German output slump fuels eurozone recession fears

BERLIN (Reuters) - German industrial output fell by more than expected in July, dipping for the fourth time in five months and deepening fears the 15-nation euro zone is teetering on the brink of recession.

Led by a downturn in manufacturing, output dropped by 1.8 percent on the month, preliminary Economy Ministry data showed on Friday. The fall was more severe than the most pessimistic forecast in a Reuters poll last week.

Year-on-year, output fell 0.6 percent, the first annual drop in nearly five years -- the last was in September 2003, Bundesbank data showed.

"Talk of a euro zone recession has been building and today's numbers have increased the probability. Even worse, the downturn of several industrial surveys suggests that the worst is yet to come," said ING Financial Markets' analyst Carsten Brzeski.

Euro zone gross domestic product (GDP) shrank by 0.2 percent in the second quarter, dragged down by a 0.5 percent contraction in GDP in Germany, the bloc's biggest economy.

The latest German output drop was probably exaggerated by the timing of school holidays, the Economy Ministry said, but it added prospects for industrial production were not improving.

"Due to the downwards trend in manufacturing orders of recent months, and deteriorating business sentiment in the manufacturing sector, industry output will probably tend to be weak in coming months," it said in a statement.

The consensus forecast in the Reuters poll was for a 0.5 percent drop in German output in July.

HIGH RECESSION RISK

Data on Thursday showed manufacturing orders unexpectedly declined by 1.7 percent on the month in July, prompting the government to express concern about the export outlook.

German luxury carmaker Porsche said this week that sales in North America nearly halved in August year-on-year as demand for its core 911 sports coupe plummeted.

The German orders drop was the eighth in a row, the longest series of monthly declines since re-unification in 1990.

"Germany's manufacturing sector is in a severe downturn," said Fabienne Riefer, an economist at Postbank in Bonn. "The other euro zone nations, which have long been in a downwards spiral, are dragging Germany down with them."

On Wednesday, Deputy Economy Minister Walther Otremba told Reuters the German economy was likely to contract in the third quarter -- implying its first recession in more than five years.

Alexander Koch, an economist at Unicredit, put the chance of Germany entering a recession at 70 percent.

Output data for June were revised down by a tenth of a point to show a monthly gain of 0.1 percent, the ministry said.

A breakdown of the production figures showed manufacturing output fell 2.0 percent on the month in July. Energy output rose by 1.2 percent and construction output fell 2.0 percent.

(Additional reporting by Iain Rogers; Editing by Chris Pizzey)