Germany's economic contraction in the fourth quarter was driven by a drop in exports and investments as the sovereign debt crisis damped euro area demand.

Exports fell 2 per cent from the third quarter and company investment in plant and machinery declined 0.7 per cent.

Gross domestic product dropped 0.6 per cent, the office said, confirming an initial estimate on February 14. From a year earlier, the economy grew 0.4 per cent when adjusted for working days.

Europe's largest economy should avoid recession and return to growth this quarter as industrial production picks up, the Bundesbank said on February 18.

While unemployment at a two-decade low and exports to emerging markets are helping Germany to weather the euro-area recession, uncertainty over Europe's path out of the debt crisis could still weigh on the recovery.

Household spending rose 0.1 per cent in the fourth quarter and public spending increased 0.4 per cent, today's report showed.

Domestic demand added 0.2 percentage point to GDP, while net trade subtracted 0.8 percentage point.

Euro-Area Recession The recession in the 17-nation euro area deepened in the fourth quarter, with GDP falling by a more-than-forecast 0.6 per cent, damping demand for German goods in the country's largest export market.

While measures of economic confidence in Europe have risen, European Central Bank President Mario Draghi has said he expects further weakness in the region's economy in the first half of the year followed by a "very gradual" recovery.

The ECB forecasts a 0.3 per cent contraction for the euro area this year, while the Bundesbank predicts 0.4 per cent growth in Germany.

Bloomberg