BERLIN German manufacturing contracted very slightly in January but output and new business grew, a survey showed on Friday, suggesting Europe's largest economy is picking up after shrinking in the last quarter of 2012.
Markit's Purchasing Managers' Index (PMI) for the German manufacturing sector rose to 49.8 in January from 46.0 the previous month, coming in just below the 50 threshold that separates growth from contraction.
It was the 11th straight month of decline, but easily the slowest rate of contraction in that time. The final reading came in above a preliminary estimate of 48.8.
Output moved into positive territory for the first time since March 2012 as factories churned out more consumer and intermediate goods, though they produced fewer investment goods.
"Germany's manufacturing sector saw a huge turnaround in momentum at the start of the year," said Tim Moore, senior economist at Markit.
"A return to growth in manufacturing production is perhaps the strongest signal yet that Germany's economy has already swung back into expansion after the fourth quarter drop in gross domestic product (GDP)."
Manufacturing contributes around 21 percent of Germany's gross domestic product, according to World Bank figures.
New orders grew for the first time since June 2011 partly due to higher domestic demand, helping offset weaker appetite from abroad. That bolsters the government's hopes that private consumption at home will prop up the German economy this year as foreign trade drags on growth.
Europe's powerhouse economy shrank by 0.5 percent in the last three months of 2012, according to preliminary data, in its worst quarterly performance since a recession amid the global financial crisis in 2008/2009.
Most economists expect the German economy to grow, albeit weakly, in the first quarter of this year and therefore escape recession, defined as two consecutive quarters of contraction.
The PMI survey will give a much-needed boost to the manufacturing sector, which has seen exports, imports and orders sliding of late, though output has risen modestly.
Manufacturing firms have also taken a knock, with steelmaker Salzgitter (SZGG.DE) reporting a bigger-than-expected full-year pretax loss and German industrial bellwether Siemens (SIEGn.DE) saying it would continue to focus on cost cuts.
The data from Markit showed output prices dropped but input prices fell for a second consecutive month, helping reduce the squeeze on firms' operating margins, with anecdotal evidence pointing to lower steel prices.
While employment levels in manufacturing fell for a fourth straight month, these are likely to stabilize soon, as new orders and backlogs of work have done, Moore said.
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(Reporting by Michelle Martin; Editing by Hugh Lawson)