BERLIN German business morale probably sank in November and the country's services and manufacturing sectors contracted, data is set to show next week, as Europe's largest economy gets dragged deeper into the euro zone crisis.
Europe's powerhouse economy put in a strong performance during the first two years of the region's troubles but growth slowed to 0.2 percent in the third quarter and data has put contraction on the cards for the final three months of 2012.
The Ifo business climate index, a key barometer of economic health in Germany, is seen slipping for the seventh time in a row to 99.5 in November from 100.0 last month, according to the consensus forecast in a Reuters poll of 41 economists. Forecasts for the index due to be released on Friday range from 98.5 to 100.3.
"(We expect) the German economy to remain in a trough in the coming months but there should be a gradual improvement from spring," said Heinrich Bayer, senior analyst at Postbank.
German firms have taken a hit from the weak European economy, with chipmaker Infineon (IFXGn.DE) saying it would cut planned investments, utility E.ON AG (EONGn.DE) saying it will review its earnings outlook for 2013 and Commerzbank (CBKG.DE) missing its third-quarter profit forecasts.
Economists expect the current conditions component of the index to slip to 106.3 in November from 107.3 last month while they see the expectations component holding steady at 93.2, a Reuters poll showed.
"The current assessment (is likely to) have worsened with the worsening of the economic situation, the drop in new orders, the increase in inventories plus the worsening of the labor market," said Carsten Brzeski, senior economist at ING.
"There's a series of indicators showing the economy has cooled off and this is starting to be felt by companies and the industry," he added.
Recent data has shown even Europe's growth engine is suffering a setback, with the private sector shrinking, unemployment rising, industrial orders falling, output dropping and exports sliding at the fastest pace since late last year.
On Thursday, Markit's flash purchasing managers indices (PMI) are expected to darken the picture further by showing both the manufacturing and services sectors shrank in November, suggesting the private sector as a whole contracted for a seventh straight month.
The index tracking the manufacturing sector is expected to hold steady at 46.0 while the index monitoring the services sector is seen remaining at 48.4, putting both well below the 50 threshold that separates growth from contraction.
"We will probably see the German economy contract in the fourth quarter but this should be very short-lived given that the underlying fundamentals remain stable," Brzeski said.
Many other economists also see the economy shrinking in the final quarter of 2012 for the first time since late last year, though solid consumer appetite and a stable job market should help Germany avoid a recession, defined as two consecutive quarters of contraction.
Wolfgang Franz, head of Germany's panel of economic advisers, traditionally known as the "wise men", said in the Passauer Neue Presse newspaper on Friday that he did not expect a recession despite a noticeable slowing of the economy.
Germany's economic advisers, known as the "wise men", expect output to grow 0.8 percent this year and next after a record 4.2 percent expansion in 2010 and a 3 percent rise last year.
Gross domestic product data released on Thursday showed foreign trade helped prop up German growth in the third quarter, while increases in private and public consumption and construction investment helped offset a decline in equipment investment and a decrease in order backlogs. The statistics office is due to publish more detailed data on Friday.
Last month the German government slashed its 2013 growth forecast to 1 percent from 1.6 percent and raised its prediction for 2012 by 0.1 percentage points to 0.8 percent.
Other data next week is expected to show that producer prices rose by 0.1 percent on the month in October and by 1.7 percent on the year. (Editing by Catherine Evans)