Economists polled by Dow Jones Newswires had forecast a drop of just 0.5 percent. "This clearly increases the probability that real GDP (gross domestic product) has contracted in the third quarter, too, meeting the oft-applied definition of a recession," said Commerzbank analyst Ralph Solveen.
The German economy contracted 0.5 percent in the three months to June. The economy ministry also revised its initial industrial output estimate for June lower, reporting a gain of 0.1 percent on a monthly basis rather than 0.2 percent as announced originally.
July's drop was thus the fourth in five months, Capital Economics economist Jennifer McKeown said. She noted too, that "the annual rate has fallen to minus 0.6 percent, marking the first time that production has contracted on an annual basis in nearly five years."
In July, industrial and construction sector output fell 2.0 percent, while the volatile energy sector posted growth of 1.2 percent. Within the industrial sector, manufacturers of machine tools and other capital goods reported a drop of 3.7 percent.
"German industry is now facing increasing difficulties in its non-eurozone capital goods markets, which had remained relatively resilient so far," said UBS economist Martin Lueck.
The ministry also calculates a two-month sliding average to smooth out exceptional movements and this showed that overall output in June and July had fallen by 1.7 percent from the level in April and May.
Industrial orders, meanwhile, fell in July for a record eight month in a row, official figures showed on Thursday, losing 1.7 percent compared with June.
"The situation in the industrial sector will not improve anytime soon," said Alexander Koch at UniCredit Markets. "We rate the chances as high that the German economy will slide into a technical recession."
Both Solveen and Koch said there was no chance the downward trend would improve in the coming months. But McKeown added that "one possible source of comfort is that the government claims that the latest figures have been distorted by workers taking extra days off around the school holidays."
Lueck's opinion was that "this downturn will probably turn out to be less painful for the German economy than the last recession in 2002-03."