GO
Loading...

Germany’s Strong Man of Europe Image Threatened

Caspar Benson | Getty Images

Germany's economic strength is showing increased signs of fading, as the euro zone crisis continues.

Europe's largest economy had emerged relatively unscathed from the credit crisis, and had even benefited from the weakened euro.

Now, it looks as though the strains of propping up the region may be taking their toll, ahead of a crucial election later this year.

(Read More: Is Germany Sliding Back Into Recession?)

The economy shrank by 0.5 percent in the final quarter of 2012, according to data released Tuesday, meaning that German gross domestic product (GDP) grew by just 0.7 percent last year, down from 3 percent in 2011 and 4.2 percent in 2010.

And the German government cut its growth forecast for the year to just 0.4 percent, down from 1 percent, on Wednesday.

German businesses don't appear to be investing for the future through buying industrial equipment – a bad forward-looking sign for the manufacturing-driven economy. With recession in the euro zone, its main trading partner, this is unsurprising.

Industrial production is expected to have fallen by more than 2 percent in the last quarter of 2012, a substantial fall after the third quarter's 0.9 percent rise.

Initial signs for exports, imports and industrial orders for the concluding months of 2012 also suggest that the lead-in to this year has been weak.

Economists are split over whether Germany is experiencing a temporary setback, or something more serious.

Opinions range from the declaration Rolf Schneider, economist at Allianz, that there are "no grounds for pessimism" in the latest figures, to the bearish Carl Weinberg, chief economist at High Frequency Economics, who argued that there are no "sources of growth for this economy, other than a reversal of fiscal austerity."

(Read More: More Austerity for Germany?)

Others are hedging their bets. European economists at Morgan Stanley this week warned of "sizable additional downside risks" to their forecasts for the German economy.

Written by CNBC's Catherine Boyle. Twitter: @cboylecnbc.

Europe Video