Germany's private sector shrank for the second month running in June, with manufacturing activity hitting a three-year low, suggesting that Europe's largest economy may contract in the second quarter as the euro zone crisis hits home.

Markit's composite Purchasing Mangers Index (PMI) slid to 48.5 this month from 49.3 in May, according to a flash estimate released today, falling further below the 50 mark which separates contraction from expansion.

The index slumped to its lowest level since the height of the global financial crisis in June 2009, weighed down by the country's manufacturing sector, which shrank at its fastest rate since that same month, while growth in the services sector nearly ground to a halt.

The numbers add to concerns that Germany's economy is losing stamina and may have contracted in the second quarter after it steamed ahead in the first three months of the year, helping the euro zone avoid recession by growing 0.5 per cent.

"The average output index for Germany in the second quarter is 49.4 so that's probably similar to around a 0.1 per cent drop in GDP," Markit chief economist Chris William said. "The rate of decline accelerated towards the end of quarter in terms of both output and new orders, so that doesn't augur well for July and further months."

But he said the economy could see growth if activity rose in sectors of the economy not covered by the PMI survey, such as government spending or construction activity.

Berlin expects the economy to grow moderately throughout 2012 after the first quarter's unexpectedly strong expansion, according to the finance ministry's monthly report released today.

A PMI index tracking the manufacturing sector dropped to 44.7 in June from 45.2 last month, undershooting the consensus forecast in a Reuters poll of 32 economists that the reading would remain at last month's level.

Manufacturing companies had to contend with a diminishing pipeline of orders and an accelerated decline in their backlogs of work. The amount of goods factories purchased from their suppliers stood at its lowest level in three years, pointing to a future decline in production or warehouse stocks of inputs.

"German manufacturers were at the forefront of the downturn as a worsening global economic backdrop and the ongoing euro crisis weighed heavily on export demand," Tim Moore, a senior economist at Markit, said in a statement.

Inflation pressures eased in Germany, with manufacturers' input prices falling at their fastest rate since August 2009, while weak demand meant companies had to slash their output prices.

"(There's) a general moderation in the inflationary pressures throughout the system, which bodes well for consumer price inflation, (which) should come down further (and) may even come down faster than many people are expecting," Mr Williamson said.

Business activity in the services sector was at its weakest since November 2011, with a reading of 50.3 compared with 51.8 last month, as the rate of decline in new business and backlogs of work sped up.

The reading was well below the consensus forecast of 51.5 in a Reuters poll of 26 economists.

Business outlook in the services sector plunged to 47.0 from 55.9 in May, its biggest drop in all 15 years of the survey's history, as firms fretted about the euro zone's future ahead of the Greek election.

"While an impending 'Drachmageddon' scenario has been avoided, there nonetheless seems a deepening consensus among German businesses that the euro area turbulence has already damaged their growth prospects for the latter half of 2012," Markit's Moore said.

The slump in outlook comes after a ZEW survey published on Tuesday showed analyst investor morale sank in June at its fastest rate since October 1998 on worries about the health of the Spanish banking sector and uncertainty over the Greek election outcome.

Rising employment in the services sector offered a glimmer of hope but Mr Williamson said this was likely a temporary blip and added that he expected to see the situation in the German labour market deteriorate going into the third quarter if demand remained low.

Other data released this month also suggests Germany is entering troubled waters, with imports tumbling at their fastest rate in two years in April, exports falling more than expected and industrial orders posting their sharpest decline since November 2011 in April as contracts from abroad dried up.

Reuters