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Germany, engine of Europe, faces looming recession

(MoneyWatch) The ongoing financial crisis in Europe and economic slowdown in the rest of the world may soon push Germany's powerhouse economy into recession, according to the country's central bank. For Americans, Germany's struggles are a stark reminder of the interconnectedness of the global economy, raising concerns about how long the U.S. can remain decoupled from the eurozone's festering problems.

In a report released Friday, the Bundesbank cut its growth forecast for the nation and said that Europe's most successful economy is likely to enter a recession next year. The bank projects 0.7 percent growth this year and 0.4 percent next year. That estimate is significantly more pessimistic than its June outlook, when the Bundesbank forecast 1 percent growth for 2012 and 1.6 percent in 2013.

A recession -- defined as two consecutive quarters of shrinking gross domestic product - has likely already started in Germany, according to the report. The bank expects final economic numbers for the year to show that the country's growth fell over the final quarter of the year, a trend it expects to continue through at least the first quarter of 2013.

This outlook seemed to be confirmed by a separate report Friday from the German economic ministry that said industrial output fell 2.6 percent in October, with production of investment goods and construction slumping. This comes on the heels of a 1.3 percent drop in September and amounts to the sharpest monthly decline in this activity in Germany since mid-2009.

"October's drop in German industrial production provides a very weak start to [the fourth quarter], suggesting that the economy will probably dip back into recession," said Jennifer McKeown, an analyst at Capital Economics, in a research note. "The 2.6 percent monthly fall was much weaker than the consensus forecast of -0.5 percent, and even our own more downbeat projection of -1 percent. It will have come as a particularly nasty surprise after data yesterday revealed an increase in industrial orders."

The Bundesbank blamed the contraction on economic weakness in the euro area and in parts of the globe. But it also emphasized that Germany's economy is fundamentally in "good shape," predicting that Germany will rebound quickly if the global economy improves and the eurozone find a way out of its crisis.

By some measures, it is a testament to Germany's resilience that it took this long for the problems afflicting the eurozone to ripple into its own economy. Even as the rest of Europe faltered, its GDP grew 4 percent in 2010, 3.1 percent in 2011 and defied many economists' expectations by continuing to expand for the first three quarters of this year.

This success was built on exports, thanks to the nation's strong trading ties around the world, along with slow wage growth. 

The U.S. recovery also has been helped by increasing exports, most notably in the energy sector. But Germany's recent decline may bolster the case made by the Obama administration and many economists that the U.S. must act to stimulate its own economy as a buffer against the economic downdraft affecting Europe.

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