By Dave Graham
BERLIN, Nov 7 (Reuters) - A record drop in manufacturing output in September set the seal on Germany's likely descent into recession, even though foreign demand for its goods held up better than expected at the end of the third quarter.
German industrial production posted its biggest drop in nearly 14 years in September, led by a 3.8 percent fall in manufacturing output, the biggest on record since the country reunified in 1990, Bundesbank data showed on Friday.
German exporters' fortunes revived slightly in September with the first monthly rise in exports in three months. By contrast, its biggest trading partner France posted a record trade deficit of 6.25 billion euros ($8 billion).
Exports from Germany rose faster than expected, but imports showed even stronger growth and the country's trade surplus fell by around 20 percent in the third quarter, suggesting net trade had eaten into growth in the July-September period.
Preliminary German third quarter gross domestic product (GDP) data, due next week, is expected to show a decline of around 0.25 percent, a government official familiar with the figures has told Reuters. This would be the second consecutive quarter of negative growth, the technical confirmation of an economy in recession.
Ulrike Kastens, an economist at Sal. Oppenheim in Cologne, said waning global demand would increasingly be felt in Germany, the world's biggest exporter of goods since 2003.
"The third quarter should be very weak and foreign trade will not be able to support growth," she said. "The low euro rate offers some support but falling demand is a bigger factor."
The euro has fallen by over 30 cents against the dollar since hitting a record over $1.60 in July, helping to make German goods less expensive in dollar-denominated markets.
WORSE TO COME
Adjusted for seasonal variations, total German output fell by 3.6 percent in September, the second drop in three months, preliminary figures from the Economy Ministry showed on Friday.
In part, the data reflected a sharp output jump in August, but Jennifer McKeown at Capital Economics noted September was the first month in five years in which industrial production had fallen below the year earlier level -- by 2.3 percent.
"Looking ahead, industrial activity is set to get even worse -- the Ifo manufacturing index points to falls in output of some five percent on the year," she said.
"Given that the service sector is unlikely to pick up the slack, we expect German GDP to fall by 0.5 percent next year."
German manufacturing orders posted their biggest monthly fall in September since 1990, while the International Monetary Fund has forecast that the world's developed economies are heading for the first full-year contraction since World War II.
German engine maker Deutz AG said on Friday it planned to significantly reduce its temporary workforce as it attempts to adjust to a tougher economic environment.
The Ifo think tank's monthly poll of corporate Germany in October showed a gauge of business expectations had fallen to its lowest level since the country reunified 18 years ago.