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Recession fears in Germany as sentiment slides

Richard Carter
A Siemens employee works on a gas turbine rotor in its factory in Berlin in November 2012. German industrial output took another tumble in October, weighed down by slumping demand in the key construction sector, official data showed on Friday.

Fears that the eurozone debt crisis could propel Germany into recession grew on Tuesday after investor sentiment in the bloc's biggest economy dropped unexpectedly.

The widely watched index of investor confidence compiled by the ZEW economic institute fell to minus 15.7 points in November from minus 11.5 in October.

Analysts polled by Dow Jones Newswires had expected an improvement to minus 10.0 points.

"Prevailing recessionary developments in the eurozone impact the German economy via foreign trade and a lack of confidence," said ZEW chief Wolfgang Franz in a statement.

"This is likely to be a burden for economic growth in Germany during the next six months," added Franz.

A separate indicator measuring financial market players' view of the current economic situation in Germany also fell to a reading of plus 5.4 points in November from plus 10.0 points in October.

That was its lowest level since June 2010 when it was in negative territory.

Jennifer McKeown, Senior European Economist at Capital Economics, said the index was "consistent with economic stagnation in Germany" but she expected Europe's powerhouse to contract.

"We think that the economy will slide back into recession next year as the peripheral debt crisis intensifies and business and consumer confidence weaken further," she wrote in a research note.

Another economist, Annalisa Piazza from Newedge Strategy, said: "We don't expect the German economy to collapse anytime soon but weakness is certainly likely to prevail" in the second half of this year.

Germany has generally fared better than the rest of the 17-nation eurozone during the three-year debt crisis, but analysts have warned that it cannot resist the turmoil indefinitely.

While many eurozone countries slipped into recession, Germany notched up growth of 0.5 percent in the first quarter and 0.3 percent in the second quarter.

Provisional data for third-quarter output will be released on Thursday.

But the country's central bank warned last month that the economy would slow sharply towards the end of the year and could even contract.

In October, the German government fractionally upgraded its growth forecast for the current year to 0.8 percent, but slashed its prognosis for next year to just 1.0 percent.

The latest version of the Ifo business confidence survey showed German firms were pessimistic about the outlook for Europe's economic powerhouse, as the index slumped to a two-and-a-half year low.

To compile its survey, the ZEW asks analysts and institutional investors about how they view the current situation in Germany as well as their expectations for the coming months.

It is seen as a volatile indicator and generally less reliable as a guide to future economic trends than the business confidence survey compiled monthly by the Ifo institute.