Fears of German recession as moment of truth looms

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Just days before Germany's much anticipated third quarter gross domestic product (GDP) data is released, business leaders and policy makers warn that the euro zone's largest economy has lost its competitiveness and is on the brink of a recession.

The chair of the German Banking Association, Juergen Fitschen, told CNBC on Monday that it was "undeniable that we have slowed down recently."

"We cannot insulate ourselves against the factors that have contributed to the current state of affairs…But, also, [there is a] slow recovery in some of our neighboring countries and also a lack of demand to finance infrastructure projects in Germany itself," he said.

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Speaking to CNBC on the sidelines of a press conference held by the association, he said: "We have to remind ourselves that we have not spared continuing efforts to renew our competitiveness and that is something that applies obviously to our neighboring countries as well," he continued.

Fitschen's comments came amid other severe critiques of the German economy and outlook, just days before the release of the GDP data on Friday.

Second quarter data in August showed data showed Germany's economy had lost momentum, contracting for the first time in over a year. Quarter-on-quarter, GDP contracted 0.2 percent. If the economy contracts again in the third quarter, Germany will technically be in recession.

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The head of Germany's influential Ifo economic research institute said that was a distinct possibility on Monday.Speaking to Reuters, Hans-Werner Sinn said that Germany was teetering on the brink of a recession due to weakness in major emerging trading partners.

"It is going to be really close," Sinn warned, saying that surveys by the Ifo institute pointed more towards a recession.

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Meanwhile, senior ECB policy maker Yves Mersch told an audience in Stuttgart on Monday that the bloc's recovery and that of its top economy,Germany, has lost pace.

"The economic situation is critical, the growth is weak and inflation is unusually low,"Mersch said, according to a Reuters report. "The economy has lost momentum." He singled out Germany, saying it no longer stood apart against the bleak backdrop. There was no sign of improvement in its sluggish performance in recent data, he said.

As such, he said, it was "theoretically possible" that the European Central Bank (ECB) could examine the possibility of buying state bonds. So far, however, such a move has faced strong opposition from Germany which fears it would lead to rampant inflation.

Inflation is not something the euro zone currently has to worry about, however. On the contrary, the 18-country region is mired in falling price inflation, showing a pervasive lack of demand that is exacerbating the economic slowdown.

After the ECB decided to keep interest rates at record lows last week, the bank's President Mario Draghi hinted at further aggressive stimulus measures in order to revive the region.

"Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate," Draghi said.

There's still no sign that the central bank will come to the euro zone's rescue at any time soon, according to one market analyst. "Most investors continue to hang their hats on the ECB ultimately being forced into full blown sovereign bond buying, after Draghi's comments last week," Michael Hewson, chief markets analysts at CMC Markets, said in a note on Tuesday.

"This remains by no means certain and given recent comments from other ECB policymakers since last week's meeting, doesn't sound in any way imminent…The bar is still likely to remain high for any further interventions this year, regardless of this week's Q3 GDP [from Germany and the euro zone] and monthly inflation data on Friday."

- Annette Weisbach contributed reporting to this story.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld