German recession fears grow as output drops 4%

A second day of weak German data sent European markets into retreat today with stocks, the euro and periphery euro zone government debt all knocked by the mounting evidence of an abrupt slowdown in the bloc’s economic engine room.

A day after German industrial orders saw their biggest monthly drop since the height of the global financial crisis in 2009, its industrial output figures for August plunged by 4.0 per cent, also the biggest fall in five years.

“Industrial production is currently going through a weak phase... but the current decline is exacerbated by holiday effects,” Germany’s economy ministry said in a statement. “All in all, one should expect weak production for the third quarter as a whole.”

Asian shares had made minor gains overnight but the weak data saw European bourses jolt lower, led by a 0.7 percent drop on Germany's Dax which has now lost 7.5 per cent in the last three weeks. London, Paris, Milan and Madrid all took tumbles, while Italian, Spain, Portuguese and also French government bonds yields rose amid doubts about what a slowing Germany meant for their more fragile economies.

Germany's and the euro zone's renewed weakness is part of broader world wide picture. Apart from the United States, indicators of global growth have slipped sharply over the past few months.

Economists at Barclays highlighted on Tuesday that their global manufacturing index is at its lowest level since May and the IMF is expected to cut back its growth forecasts later. "Over the summer, there has been quite an apparent divergence in the global growth story," said Kerry Craig, a global markets strategist at JP Morgan. "What we are seeing is quite an ugly and uneven recovery. Growth in euro zone has stalled... and then you have to contrast that with what is going on in the US where we saw the really strong jobs data on Friday."

The euro also weakened slightly after the German data, though with traders still looking for an excuse to take some profits on the dollar’s recent surge, the dip was only minor.

Reuters