German industrial production declined in August as the sovereign debt crisis damped euro-area economic growth and prompted companies to scale back investment.

Production fell 0.5 per cent from July, when it gained 1.2 per cent, the Economy Ministry in Berlin said today. Economists had forecast a drop of 0.6 per cent, according to the median of 39 estimates in a Bloomberg News survey. From a year earlier, production fell 1.4 per cent when adjusted for working days.

Europe's largest economy is cooling as the debt crisis forces governments, companies and consumers across the euro region to retrench. Factory orders dropped 1.3 per cent in August, the economy ministry said yesterday. At the same time, exports to nations outside the currency region and unemployment at a two-decade low are helping to limit the slowdown.

"Germany has long been successful in isolating itself from the downward trend," said Thilo Heidrich, an economist at Deutsche Postbank AG in Bonn. "Now this is coming to an end. I expect the economy to stagnate for the rest of the year."

Construction activity dropped 2.8 per cent in August from July, today's report showed.

Production of intermediate goods fell 1.3 per cent and investment goods production was unchanged. Consumer goods production rose 0.3 per cent and energy output gained 1.5 per cent.

Economic growth slowed to 0.3 per cent in the second quarter from 0.5 per cent in the first, and business confidence fell to the lowest in more than two years last month.

Bayerische Motoren Werke, the world's largest maker of luxury cars, in August reported its first drop in quarterly profit in almost three years and warned that Europe's debt crisis could cast further clouds on the global growth outlook.

Still, investor confidence rose for the first time in five months in September after the European Central Bank announced an unlimited bond-buying program and Federal Reserve officials agreed to expand monetary stimulus by purchasing additional assets. German exports unexpectedly rose for a second month in August, jumping 2.4 per cent, the Federal Statistics Office said earlier today. Economists had forecast a 0.6 per cent decline.

The German economy will expand 0.9 per cent this year compared with a 0.5 per cent contraction for the euro area as a whole, the IWH and Kiel Economics research institutes forecast last month.

"There are some positive signs out there, but only as long as the crisis in the euro area doesn't get worse," said Stefan Muetze, an economist at Helaba in Frankfurt. "We might see some growth for the rest of the year, but it will definitely be a very low number."

Bloomberg