Eurozone debt crisis takes toll on German economy

The German economy, Europe's biggest, looks set to come to a standstill as the eurozone debt crisis increasingly takes its toll, industrial output data show.

Industrial production in September contracted by 2.7 per cent compared with the previous month, the economy ministry said, a much steeper decline than expected. At the same time, the ministry revised up the figures for August, saying that output had fallen by 0.4 per cent rather than the 1 per cent previously estimated.

The ministry insisted the latest decline was exaggerated by the timing of summer holidays and that looking at August and September combined, to iron out short-term fluctuations, output contracted by just 0.2 per cent compared with June and July.

But analysts believe that, after a raft of negative economic data recently, economic growth in Germany is faltering.

The figures "confirm that an underlying economic downturn is accompanying the region's debt crisis", said Capital Economics' senior European economist, Jennifer McKeown.

Commerzbank economist Ulrike Rondorf agreed.

"The recession that we anticipate for the eurozone will not leave Germany completely unscathed," she said.

"The biggest risk stems from the sovereign debt crisis, as the persisting uncertainty is poison for economic growth ... which is why GDP is set to stagnate at most" in the final quarter of this year, Rondorf said.

Barclays Capital economist Thomas Harjes said the output data "show that firms are increasingly delaying investment decisions, likely reflecting the high uncertainty created by the euro area sovereign debt crisis".

Nevertheless, the situation was not as bad as it could be, economists said.

"The decline - even though more pronounced than expected - is in line with latest economic developments. We expect a soft landing of the German economy in the current fourth quarter. There is no reason to worry about that - it could be so much worse," said Peter Kaidusch, eurozone economist at Natixis.

Andreas Rees, chief German economist at UniCredit Research, said: "No, we do not need to fasten our safety belts and prepare for a crashing German economy.

"Yes, a strong export-driven slowdown is under way. However, a crash a la Lehman three years ago is not in the pipeline in our view," Rees said.

He said that he was sticking to his forecast for a slowdown in growth at the end of the year, "but growth would nevertheless remain in positive territory".

- AAP