BBC News Online: Business

Germany's economy shrinks

German industry has stagnated this year

The country's economic output, or GDP, contracted by 0.1% in the quarter, the Federal Statistics Office said.

On an annual basis, GDP rose 0.3% in the July to September period, the weakest performance since early 1997.

The release of the data followed a report revealing a drop in German business sentiment, and warnings from Finance Minister Hans Eichel that economic activity would remain subdued until next spring.

Risks mount

Germany's finance ministry said the data indicated that economic risks had increased.

"However, economic weakness should be overcome soon," the ministry said in a statement.

"In 2002 economic forces of buoyancy should win the upper hand."

The ministry pinned the blame for the contraction on increased energy prices and food costs.

Opinion is still mixed on whether Germany will topple into a prolonged slump.

Some analysts forecast a mild rebound later in the year, driven largely by consumer spending.

"I think private consumption will be stronger in [the fourth quarter] because consumers will move forward purchasing ahead of the euro changeover," said Ulla Kochwasser from IBJ Deutschland.

Troubles spread

Germany's stagnation has worrying implications for the whole of Europe.

The German economy accounts for more than one-third of total eurozone output, and the latest figures indicate that it is performing much worse than the wider European average.

While countries such as France and Italy have so far avoided the worst effects of the post-attacks slowdown, Germany's possible slide into recession is likely to drag the whole region down.

Germany's economic woes have heightened calls for action from the German government.

But Chancellor Gerhard Schroeder has stoutly resisted demands for an economic stimulus package.

Many other governments - notably the US - have launched tax and spending packages in an effort to encourage growth.