Germany may be on the brink of recession after the sovereigndebt crisis caused the economy to contract in the final quarter of2011.

Europe's largest economy shrank “roughly” 0.25 percent in thefourth quarter from the third, the Federal Statistics Office inWiesbaden said today in an unofficial estimate. Economists such asChristian Schulz at Berenberg Bank expect gross domestic product tocontract again in the current quarter. A recession is defined astwo consecutive quarters of declining GDP.

“If the euro crisis does not get worse or is finally broughtunder control after another wave in early 2012, the German economycan rebound nicely from the summer onwards,” said Schulz, a senioreconomist with Berenberg in London. “However, we see a 25 percentchance of the euro crisis remaining out of control longer, orcompletely spiraling out of control with a series of sovereign andbank defaults. In such a scenario, Germany would enter a majorrecession.”

Growth slowed to 3 percent in 2011 from 3.7 percent in 2010,which was the most since German reunification two decades earlier,the statistics office said. The economy last contracted in 2009,when it was in the throes of the global financial crisis.Unemployment at a two-decade low may bolster growth this year bysupporting consumer spending.

Domestic demand was the main contributor to GDP growth lastyear, adding 2.1 percentage points, today's report showed. Privateconsumption increased 1.5 percent in the year, while governmentspending rose 1.2 percent. Investment in plant and machinery gained8.3 percent.

The euro rose after the 2011 GDP report before giving up itsgains to trade at $1.2755 at 11:50 a.m. in Frankfurt. Europeanstocks fluctuated, with the Stoxx Europe 600 Index little changed.The MSCI Asia Pacific Index added 0.3 percent today, while Standard& Poor's 500 Index futures gained less than 0.1 percent.

The weaker global economy and waning demand from debt-strickeneuro-area neighbors have eroded German foreign sales, the mainpillar of its economic expansion. Net trade contributed 0.8percentage point to growth last year, with exports up 8.2 percentand imports gaining 7.2 percent. In 2010, exports increased 13.7percent.

“All in all, the German economy has remained relativelyresilient,” said Annalisa Piazza, an economist at Newedge Group inLondon. “Signs of moderation have recently emerged but we expectthe German economy to remain afloat in the coming quarters,maintaining its role as the major engine of growth for the euroarea.”

2012 Forecast

German growth will slow to 0.6 percent this year beforerecovering to 1.8 percent in 2013, the Bundesbank predicted on Dec.19. The European Central Bank, which has cut interest rates to arecord low and flooded the banking system with cash during the debtcrisis, last month reduced its 2012 growth forecast for the17-nation euro region to just 0.3 percent.

Spanish industrial production fell the most in two years inNovember, reflecting a contraction in the euro area'sfourth-largest economy as the government prepares to implement anew wave of austerity. Output at factories, refineries and minesadjusted for the number of working days declined 7 percent from ayear earlier, the most since October 2009, the National StatisticsInstitute in Madrid said today.

In the U.K., the goods-trade deficit widened more thaneconomists forecast in November as exports dropped, the Office forNational Statistics said. The trade gap widened to 8.64 billionpounds ($13.6 billion) from 7.87 billion pounds in October. Exportsfell 1.5 percent on the month while imports rose 1.1 percent.

The effects of Europe's debt crisis may cost the U.S. as much ashalf a percentage point in economic growth this year, Goldman SachsChief Economist Jan Hatzius said at an event in Frankfurttoday.

The U.S. Federal Reserve will release its Beige Book surveylater today, and the Mortgage Bankers Association will give data onmortgage applications for the week ended Jan. 6.

“The debt crisis is unprecedented and economic forecasts in thisenvironment are very difficult,” said Joerg Kraemer, chiefeconomist at Commerzbank AG in Frankfurt, who expects the Germaneconomy to contract “a little” in the first three months of thisyear. “For 2012 as a whole, we expect stagnation,” he said.

There are signs Germany's economic downturn will be shallow.Business confidence unexpectedly rose for a second month inDecember and service industries expanded.

The statistics office said today it may revise its fourth-quarter GDP assessment by the time official data are published onFeb. 15.

“Minus 0.25 percent is a too pessimistic call both on the basisof hard and soft data,” said Andreas Rees, chief German economistat UniCredit in Munich. “Our bottom line: Don't worry too muchabout 2012, and let's be grateful about last year.”

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