Fears of German recession follow Moody's warning

Germany's economic might showed worrying signs of wilting in the face of Europe's debt crisis yesterday after the biggest collapse for the nation's private sector in more than three years.

Germany, which accounts for more than a quarter of the eurozone economy, was also on the wrong end of a rare market sell-off in the wake of ratings agency Moody's threat to slash its gold-plated triple-A credit rating.

A rattled Berlin stressed Germany's "very sound economic and financial situation" but investors switched out of the nation's ultra-safe Bunds, pushing its 10-year borrowing costs above 1.2 per cent after hitting record lows on Monday.

Experts warned Germany faced a growing recession threat after the crisis wreaked havoc with its key export sector this month, according to financial information company Markit.

Its benchmark of private manufacturing and services firms in Germany, where a score under 50 signals shrinking growth, sank to 47.3, signalling the fastest pace of private-sector contraction since June 2009. Manufacturers were worst hit with export orders and volumes of new business falling at the fastest in three years.

It senior economist Tim Moore said Germany could be set for a steeper drop in output than the 0.2 per cent fall seen at the end of 2011. This would almost certainly be enough to tip the eurozone back into the red despite avoiding a technical double recession with stagnant growth during the first three months of the year. He warned: "German business conditions are far less healthy than those seen during the first half of 2012."

Yesterday's Ifo barometer of business confidence is set to show morale among businesses sinking to a 28-month low in July. German retailers have also been suffering as the department store chain Karstadt shed 2,000 jobs and Metro, the world's fourth-biggest retailer, said the debt crisis was sapping the confidence of German consumers.

Despite glimmers of improvement in France's services sector, the wider eurozone also saw a sixth successive month of economic contraction. Markit said employers were cutting jobs at the fastest pace since January 2010 as the latest twists in the crisis, now threatening to envelop Spain, set the scene for a turbulent summer in financial markets.

ING Bank's economist Peter vanden Haute said: "The combination of financial market tensions and fiscal austerity remains an important drag on domestic demand in the eurozone, with external demand too weak to have an offsetting impact. A turnaround in sentiment can only be expected when the future of the eurozone starts to look more secure. Unfortunately, that does not seem be happening any time soon."

Germany's weakening economy, placed on "negative" outlook by Moody's along with the Netherlands and Luxembourg, is a fresh blow for Chancellor Angela Merkel amid growing impatience among taxpayers at shouldering bailouts for the eurozone's strugglers. The finance ministry hit back at Moody's yesterday as it pledged to "defend its 'safe haven status and continue to responsibly maintain its anchor role in the eurozone".