German factories suffer as demand for goods slumps

Germany's economic might showed worrying signs of wilting yesterday as the country reported the biggest collapse in private-sector output 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 after the ratings agency Moody's threatened to slash its gold-plated triple-A credit rating.

While a clearly rattled government in Berlin stressed that Germany was still in a "very sound economic and financial situation", 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 that Germany faced a growing threat of recession because the euro crisis had wreaked havoc in its key export sector this month, according to financial information company Markit.

Markit's benchmark index of private manufacturing and services firms sank to 47.3 – the fastest pace of private-sector contraction since June 2009. Any score below 50 signals a contraction. Manufacturers were the worst hit as export orders and new business volumes fell at their fastest pace in three years.

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

Today's closely-watched Ifo barometer of business confidence is likely to show morale among German business leaders sinking to a 28-month low in July. The nation's retailers are also suffering, with the department stores chain Karstadt shedding 2,000 jobs and analysts saying the debt crisis was sapping the confidence of German consumers.

The eurozone also saw a sixth successive month of contraction.

A weakening economy is a blow for Chancellor Angela Merkel, who faces growing impatience from her taxpayers at bailouts for other eurzone nations.