November 7, 2012 / 12:02 PM / in 5 years

German economy sputters as euro zone crisis bites

General view of a factory of Salzgitter Flachstahl GmbH, a company of steel manufacturer Salzgitter AG in Salzgitter March 11, 2009.Christian Charisius

BERLIN (Reuters) - German industrial output fell more than forecast in September and the government's economic advisers said the economy would grow by just 0.8 percent this year and next as Europe's largest economy gets dragged deeper into the euro zone crisis.

Recent data from Germany, Europe's growth locomotive and paymaster, has been largely disappointing, with business sentiment worsening, the private sector contracting, joblessness rising and industrial orders falling at their sharpest rate in a year, though consumer morale has held up and exports have leapt.

Wednesday's data added to the gloom, showing that industrial production dropped by a hefty 1.8 percent on the month in September, well below the consensus forecast in a Reuters poll for a 0.5 percent drop.

"The euro zone crisis is hitting the domestic economy. German companies seem to be less and less inclined to invest and that points to the economy contracting in the fourth quarter," said Stefan Schilbe at HSBC Trinkaus.

Economic advisers to the government, traditionally known as the "wise men", dampened spirits further by forecasting growth of 0.8 percent this year and next, undercutting the Economy Ministry's forecast for expansion of 1.0 percent in 2013.

"The low-point of economic momentum in Germany will probably be reached in the fourth quarter," the advisers wrote in their annual report. "We expect the German economy to pick up some steam again during 2013."

Germany may have managed to consolidate its budget well this year but it cannot rely on strong tax revenues and "special factors" such as low interest on debt, the advisers warned. Moreover it will likely have to contend with rising spending in the future due to an ageing population.


While Germany's economy long fended off the single currency bloc's troubles, expanding by 4.2 percent in 2010 and 3 percent last year, growth slowed to 0.3 percent in the second quarter of this year from 0.5 percent in the first and some economists expect a contraction in the fourth quarter.

Economy Ministry data showed factories churned out 2.2 percent fewer intermediate goods and 3.5 percent fewer capital goods on a monthly basis in September, dragging overall output down. Activity in the construction sector, which rose by 2.7 percent on the month, was the only bright spot.

"Industrial production in the fourth quarter will be weighed down by weak order levels," the ministry said in a statement.

Data on Tuesday had already shown industrial orders fell by 3.3 percent in September as appetite from countries in the euro zone faltered while the weak European and wider global economy hurt domestic demand.

"With the various industrial survey indicators pointing to steeper falls in production ahead, Germany's growth engine is still sputtering, if not in reverse," said Jonathon Loynes, chief European economist at Capital Economics.

Industrial companies have taken a knock recently, with German steelmaker Salzgitter (SZGG.DE) cutting its full-year outlook and Continental (CONG.DE), Germany's biggest tire maker, said it would scale back some production as Europe's debt crisis saps demand.

German industrial production has nonetheless fared much better than struggling euro zone peers such as Spain, where industrial output fell by 7 percent on the year in September.

Industrial production data for August was revised up to a drop of 0.4 percent from a decrease of 0.5 percent. (Editing by Gareth Jones)

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