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Germany slashed its growth forecasts on October 14, casting more doubt over the faltering economic recovery in Central Europe.

The German government cut its growth forecast for this year to just 1.2%, a huge drop from the 1.8% it predicted in April. For 2015 it trimmed 0.7 percentage points to leave its outlook at 1.3%. Economy minister Sigmar Gabriel blamed the geopolitical crisis over Ukraine and moderate global growth for holding back a German economy heavily reliant on exports. Berlin chopped its expectations for export growth this year by 0.7 percentage points to 4%. 

The announcement came as Eurozone industrial production fell back more than expected in August, adding to fears that the region is facing a slide back into recession. Industrial production was down 1.8% month on month, the steepest fall for almost two years, to leave output 1.9% lower than a year ago. Germany produced one of the worst results, with output plummeting 4.3% month on month. 

"Particularly alarming was a 4.8% [month on month] drop in [Eurozone] capital goods such as plant and machinery, as this suggests companies are pulling back sharply on investment spending as the business outlook deteriorates," commented Chris Williamson, chief economist at Markit.

The Czech Republic and Hungary are heavily reliant on export demand out of the single currency area, in particular Germany, and their own industrial output sank alarmingly in August. Still, the picture for Central Europe is anything but clear, as illustrated by the conflicting comments coming from Polish rate setters this week. 

Analysts suggested that the Central European industrial output data was affected by holidays, and that they expect a sharp revival in September, boosted by a return to full production at the region's vital car plants. 

That is supported by healthy Purchasing Manager Index readings last month. The forward looking surveys in the Czech Republic and Hungary predicted decent levels of expansion continuing. Polish PMI data, which has been sagging for months, predicted a contraction, even though the economy is far less dependent on Eurozone demand for exports than others in the Visegrad area. 

Recession fears rising 

The Eurozone is now facing a second consecutive quarter of contracting industrial output in July-September. So far in the third quarter, production is running 0.8% behind the second quarter in Germany, meaning that even a healthy rise in September data will struggle to lift it into the black.

That raises the worry that the Eurozone will drop back into recession. "The disappointing industrial production data add to the chances that the Eurozone could see a drop in GDP in the third quarter after GDP stagnated in the second quarter," Williamson noted.

At the same time, he also points out that the data for the summer months could be exaggerating the drop in activity, with PMI numbers in the third quarter pointing to a modest rise in GDP. Regardless, bets are mounting that the European Central Bank may now press forward on stimulus measures. That would also suggest more action from rate setters in Poland and Hungary, while the Czech National Bank has little room for manoevure. 

German investors and analysts are as worried as Berlin it seems. The closely-watched ZEW Indicator of Economic Sentiment for Germany - a survey of economic confidence - dropped 10.5 points in October to return to negative territory for the first time since November 2012 at -3.6.

"ZEW's financial market experts expect the economic situation in Germany to decline further over the medium term," it said in a press release. "Geopolitical tensions and the weak economic development in some parts of the Eurozone, which is falling short of previous expectations, are a source of persistent uncertainty. These factors are tarnishing growth expectations in Germany."

However, ZEW's chief economist Clemens Fuest joined the ranks warning against an overly pessimistic view. He told Reuters: “It can’t be excluded that the third quarter will turn out to be negative, but I wouldn’t expect a longer recession, mainly because the domestic fundamentals in Germany are solid. On the export side, there are some negative factors, Ukraine and others. But there is also hope - the US economy is recovering. Overall, the situation is not as bad as people seem to think currently.”