Waning demand for exports fuels recession fears

In another sign that Europe's biggest economy is probably in recession, industrial output fell by 3.6 percent in September from August, the economy ministry said. Economists polled by Dow Jones Newswires had forecast a fall of 2.0 percent.

On a less volatile two-month basis, output rose 0.5 percent in August and September from June and July, but it fell by 1.3 percent in the third quarter compared to the April-June period, the ministry said in a statement.

"The tendency of the last few months ... is that production is clearly pointing downwards," it said. "As a result of continued weak demand ... perspectives for production are gloomy."

The German economy shrank in the second quarter and figures next Thursday had been expected for some time to confirm that output also fell in the July to September period, meaning Germany is officially in recession. Berlin has slashed its 2009 growth forecast to just 0.2 percent, the slowest rate of growth since Germany last suffered a recession in 2003. Last Monday, Germany's widely-watched Ifo sentiment indicator showed business confidence dropping in October to its lowest point in more than five years.

But Friday's data, coupled with an eight-percent slump in orders announced on Thursday – the biggest fall since German reunification in 1990 – raises fears that the downturn may be deeper and longer than expected. The "huge drop is a worrying sign of a severe downturn to come," Jennifer McKeown from Capital Economics said in a research note.

"With the service sector surveys pointing to stagnant output, next week's GDP figures will almost certainly reveal another marked contraction, leaving Germany in its second recession in five years," McKeown said.

This is borne out by a string of recent, highly downbeat assessments of conditions in the real economy from German companies – not just car giants like BMW and Daimler, but also in other sectors. Sportswear firm Adidas on Thursday said that uncertainty was so high it could not give a forecast for 2009, and on Friday reinsurance giant Munich Re dropped its 2008 profit target following a plunge in profits.

"A noticeable recovery before the second half of next year looks extremely unlikely. Lean times are ahead for the industrial sector," Unicredit economist Alexander Koch said.

Both the European Central Bank and Chancellor Angela Merkel's government have attempted to jumpstart growth, with the ECB joining other central banks in slashing interest rates and Berlin launching a stimulus programme.

But economists are sceptical that the ECB and governments have done enough to stop Germany and the entire Eurozone from entering a deep slowdown. The International Monetary Fund forecasted on Thursday that advanced economies would contract next year for the first time since World War II, with the Eurozone economy expected to decline by 1.3 percent.