Germany's economy is seen expanding by half a percent in the third quarter but the outlook has darkened as the euro zone debt crisis could push Europe's export-driven powerhouse into recession.
Germany recovered swiftly from the 2008/09 financial crisis, underpinning growth at its European trade partners. But signs have grown that the economy is entering a quieter phase as the sovereign debt crisis weighs on business sentiment.
Europe's biggest economy grew by a modest 0.1 percent in the second quarter compared with the first quarter, and economists in a Reuters poll forecast 0.5 percent quarter-on-quarter growth in the July-September period.
Looking at the monthly data, things don't look too bad in Germany actually. Trade figures picked up a bit in the third quarter ... suggesting that Germany should have continued to expand, said Jennifer McKeown at Capital Economics.
While seeing healthy growth for the third quarter, economists said the focus had shifted to coming quarters and what effects the escalating debt crisis could have on the region's main engine for growth.
Recent industrial data have shown dark clouds on the horizon -- new orders in September saw their steepest decline since early 2009, weighed down by a sharply weaker demand from the euro zone.
The best times for the German industry may now be over. Order intake, declining for three months in a row, is a clear signal that production will come down, said Heinrich Bayer, an economist at Postbank.
Industrial production has already begun to feel the pinch -- output fell 2.7 percent in September, well below analysts' expectations -- and business sentiment dipped for the fourth straight month in October, according to an Ifo survey.
Think tank ZEW's investor morale index, also due on Tuesday, is seen dropping to -52.0 in November after slumping in October to its weakest level since just after the collapse of Lehman Brothers three years ago.
Chancellor Angela Merkel's government last month nearly halved its forecast for growth next year to one percent, due to dampened expectations for exports.
A sharp slowdown in Germany's economy would have repercussions across Europe, which has benefited from a rise in German imports as the country invested heavily in its industry.
The uncertain economic outlook for the euro area have led many German companies, such as carmakers Volkswagen
Germany is already suffering from the crisis, McKeown said, adding that GDP could dip into negative territory towards the end of the year. I think it will probably show up in the official GDP figures for the fourth quarter.
Fears that Germany will have to fund further bailouts and a weaker business sentiment weighed on growth prospects for the coming quarters, McKeown said.
The longer this goes on, the more likely it seems that Germany is going to be dragged further in, and that there is going to be a recession which could even turn out to be quite a deep one if things really kick off.
Earlier this week, Germany's wise men panel of economic advisers said the situation may not turn brighter until mid-2012. It expected exports to grow 3.2 percent next year, compared with an estimated growth of 7.8 percent in 2011.
Economists polled by Reuters expect GDP to grow by 2.5 percent year-on-year in the third quarter, compared with 2.8 percent in the previous quarter.
(editing by Ron Askew)