UPDATE 1-German economy shrinks in Q4 as European demand weakens
BERLIN Jan 11 (Reuters) - Germany, Europe's largest economy, contracted in the fourth quarter of 2012 as factories slashed production in response to weak European demand but growth will pick up again this year, the country's Economy Ministry said on Friday.
Germany is set to publish an estimate of gross domestic product (GDP) for 2012 next Tuesday. Economists surveyed by Reuters have forecast 0.8 percent growth. Fourth quarter figures are expected in February.
"The tough European environment has dampened German economic growth," the ministry said in its monthly report.
"According to indicators, one should expect a significant decline in economic performance for the final quarter of the year," it added.
It added that weaker demand for German exports, combined with uncertainty caused by both the euro zone crisis and the future direction of U.S. fiscal policy, had reduced firms' willingness to make investments, causing growth to slow.
That tallies with recent data which has shown orders tumbling, output rising very modestly, exports and imports sliding and the manufacturing sector shrinking.
Most economists say Europe's economic powerhouse experienced a slight contraction in the fourth quarter, though they see it avoiding a recession - defined as two consecutive quarters of contraction - and picking up in the first quarter of this year.
The ministry said the underlying strength of the German economy as well as positive signs from the global economy indicated the economy would "revive significantly" in the course of 2013, especially given that it remains competitive and the international environment has calmed somewhat.
"A slight improvement in sentiment indicators suggests that the economy will start the new year on a positive note and will quickly overcome this temporary period of weakness," the ministry said.
Recent surveys have shown morale at German businesses picking up and investor sentiment brightening, while order levels are showing signs of stabilising.
Until last year, Germany had escaped the euro zone's problems largely unscathed, growing by a record 4.2 percent in 2010 and by 3 percent in 2011, but the economy ministry said in October it expected growth to slow to around 0.8 percent in 2012.
The ministry said a robust labour market was continuing to support the domestic economy and added that exports, traditionally a key driver of growth for Germany, were likely to gradually regain momentum this year.
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