UK fears as Germany on brink of recession

The powerhouse German economy is suffering its worst performance in more than five years - a major concern for its biggest trading partners, which include Britain.

In the last three months Germany's $3 trillion economy, the third largest in the world, contracted by 0.5%. Another result like that in the next three months and the country will officially be in recession.

Other estimates of the country's financial health have been cut. The German Federal Statistics Office now says the economy grew 1.3% in the first quarter, down from the figure of 1.5% growth previously claimed.

Economists say the new numbers are a stark warning of the road ahead for the UK. The hope was that large parts of the eurozone would avoid the worst of the credit crunch. This would enable UK companies to keep exporting goods and services, bringing in revenues that would keep them afloat.

With eurozone economies now teetering, they are likely to buy fewer UK imports. The news from Germany chimes with recent warnings from the CBI and Bank of England Governor Mervyn King that the economic slump is much worse than first anticipated.

German multinationals such as BMW, Bosch, BASF and Siemens are now likely to embark on cost cutting which could mean job losses at plants around the world.

The Federal Statistics Office said: "The economic development in the second quarter was marked by declining consumption by private households and diminished plant investment. Construction investment was, in particular, significantly lower than in the first quarter."

Economists warn that the credit crunch could be about to enter a new, darker phase. Problems that began in the US when its housing market collapsed, suddenly making millions of so-called subprime mortgages unviable, have spread around the world.

Banks left holding huge chunks of near-worthless mortgage debt have stopped lending, even to each other, driving up the cost of credit and starving firms of funds to invest.

The European Union is due to report today on how the economy of the 15 nations that use the euro is faring. It is expected to say that the eurozone shrank 0.2% in the second quarter, the first contraction since monetary union a decade ago.

European Central Bank president Jean-Claude Trichet said the economy will be "particularly weak" in the near future.

Yesterday Mervyn King said the next year will be "painful" as inflation rises to around 5%.

This makes it difficult for the Bank to justify an interest-rate cut to give relief to mortgage borrowers.