Industrial production in Germany dropped a greater than expected 1.5 per cent in June, compounding fears that Europe’s biggest economy could be heading for its first recession in more than six years.

The figures — branded as “devastating, with no silver lining” by one economist — highlight how a crisis in the carmaking industry and an intensifying trade war between the US and China have turned Germany from being the powerhouse of the eurozone economy to one of its weakest performing members.

After a brief slowdown last year, the German economy rebounded at the start of this year. But many economists, including those at the Bundesbank, Germany’s central bank, are predicting that next week’s national GDP figures will reveal the eurozone’s biggest economy shrank again in the three months to June.

The manufacturing sector, historically the engine of German growth, has become its main weakness as the car industry continues to grapple with the shift away from diesel cars to new electric models and German exporters face a slowdown in orders from China.

Germany’s 10-year bond yield fell to a new record low of minus 0.56 per cent as investors reacted to the country’s weak industrial production data. Fears of a sharp economic downturn have prompted central banks in the US and elsewhere to cut interest rates and caused bond markets to rally around the world as investors seek a safe haven.

German industrial output fell 5.2 per cent from June 2018, the statistics office said on Wednesday. Analysts in a Reuters poll had estimated output would fall 0.4 per cent during the month compared with May.

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The economic slowdown was cited by Commerzbank, Germany’s second-largest bank, as the main reason for boosting its provisions for loan losses and warning that its profit target for this year was “significantly more ambitious” because of the “worsening” conditions.

Carsten Brzeski, ING’s chief economist for Germany, said: “All in all, we would characterise today’s industrial production report as devastating, with no silver lining.” He added: “Today’s data also shows that we should prepare for contraction in the German economy in the second quarter, unless exports bring an unexpected surprise on Friday.”

The latest figures showed that the slowdown in industrial production was across the board — including intermediate goods, capital goods, energy and consumer goods. The only area that grew was construction, but this rose by a meagre 0.3 per cent after two months of decline — belying the widespread belief that Germany’s construction sector was booming.

“A look at the individual sectors shows that the crisis in the automotive sector is continuing unabated,” said Ralph Solveen, deputy head of economic research at Commerzbank. “However, the main reason for this weakness is now likely to be significantly weaker foreign demand. This all points to the fact that manufacturing will remain the weak spot of the German economy.”

Wednesday’s figures come a day after the statistics office revealed that factory orders rose unexpectedly, driven by an increase in demand from countries outside the eurozone. While those figures may have offered a glimmer of hope for Europe’s economic powerhouse, analysts pointed out that they were buoyed by a few exceptionally large orders and new orders have dropped by an average of 0.7 per cent every month this year.

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June’s decline “kills off any hopes that the strong orders data published yesterday marked the beginning of a recovery,” said Andrew Kenningham, chief Europe economist at Capital Economics. “Business surveys uniformly point to a further contraction in July, so things look set to get worse rather than better.”

Other data this week included revised down services figures that showed the sector in Germany had grown at a slower rate in July than had been earlier thought, prompting fears that the eurozone’s biggest economy may yet face a recession.

Some economists worry the downturn in Germany’s export-focused manufacturing industry is spreading to its domestic-focused services sector. “The continued plunge in production is scary,” said Alexander Krueger, economist at Bankhaus Lampe. “The longer this continues, the more likely it is that other sectors of the economy will be dragged into this.”

The German government expects the country’s economy to grow by 0.5 per cent this year and to rebound with growth of 1.5 per cent next year.

Via Financial Times