Germany's manufacturing sector contracted in October for the first time in two years, overshadowing a pick-up in the services sector which was still sluggish despite the improvement as firms felt the impact of the euro zone debt crisis, a survey showed.
Markit's German composite output index - a snapshot of the economy's health that combines services activity with manufacturing output - rose marginally to a flash reading of 51.2 from 50.5 in September, a purchasing managers' survey showed today.
The reading remained just above the threshold of 50 that separates growth from expansion, thereby indicating a slight rise in business activity.
Markit said the headline index rose on unexpected growth in the services sector, but it did not see this as an underlying trend due to a dramatic fall in the business expectations of service providers to its lowest level since April 2009.
"Everything is in the hand of European leaders at the moment because we need to restore confidence for firms to want to expand in the face of all the uncertainty," said Chris Williamson, an economist at Markit.
"We are looking here at probably stagnation of the economy in the third quarter, extending out into October," he said.
"So it won't take much to tip the indices into contraction territory in the next couple of months, which means a decline in the fourth quarter."
The manufacturing sector shrank slightly in October - ending a 27-month period of continuous expansion - on drops in output, new orders and backlogs of work. The index fell to 48.9, missing the consensus forecast in a Reuters poll for 50.0.
"German manufacturing has been the spearhead of the country's recovery," said Mr Williamson. "The downbeat numbers here are likely to feed into further weakening sentiment across other sectors of the economy very quickly." Germany's export-driven economy has recovered swiftly from the financial crisis, outperforming its peers and providing a crucial growth engine for Europe.
But the outlook has dimmed in recent months and chancellor Angela Merkel's government last week nearly halved its forecast for growth next year to 1 percent due to dampened expectations for exports.
Some economists say Germany is teetering on the brink of recession due to the deepening euro zone debt crisis, which is depressing confidence and starting to spill over into the real economy.
The Markit survey showed a broad-based reduction in German private sector new business intakes. The sub-indices for new orders in the manufacturing and services sectors read 44.7 and 48.4 respectively.
This was in line with recent forward-looking economic indicators showing a dimming outlook.
The all-important Ifo index, considered the best indicator of future underlying economic trends in Germany, slid for the fourth month in a row in October, dipping to its lowest level since mid-2010.
The PMI index tracking the services sector unexpectedly rose to 52.1, the data showed. Economists in a Reuters poll had forecast 49.7, after the sector contracted for the first time in more than two years in September.
"We don't see this as an underlying trend because of that fall in the expectations index which has good advance lead on activity levels," said Mr Williamson.
The index for private sector employment still pointed to growth, yet backlogs of work contracted for the fourth month.
"Firms just haven't got the pipelines of work they had before, so they are inevitably going to start looking at head counts if new orders continue to fall," Mr Williamson said. "You will see a return to job cutting maybe by next year."
The labour market is one of the few areas of the German economy that has continued to deliver good news in recent months.
The government said last week it expected the jobless rate to drop further next year to 6.7 per cent from 7 per cent in 2011.
Reuters