---- by STUART WILLIAMS ----
FRANKFURT (AFX) - A slump in German March output is a harbinger of even worse data to come from Europe's largest economy, and has raised the spectre of a full scale recession in the manufacturing sector, economists said.
They added bad figures had been expected but the fall of 3.7 pct surpassed even the gloomiest of expectations. Construction output dived 13.6 pct in what the finance ministry called a "genuine collapse", while manufacturing output slumped 3 pct.
"The figures were really awful", said Rainer Guntermann at Dresdner Kleinwort Wasserstein. "It is possible to say with truth that we have the danger of a recession in the manufacturing sector", he said.
The disappointing data comes after an increase in seasonally adjusted April umemployment and a slump in manufacturing orders earlier in the week confirmed fears of a dramatic growth slowdown in Germany this year.
Emmanuel Ferry at Exane said the output fall was the worst recorded since January 1995.
"These figures are important because in my opinion they herald the entry of Germany into an industrial recession, with production shrinking in the first, second and third quarters", he said.
Economists added the figures have once more made clear that Germany's export dependence makes it very vulnerable to the slowdown in the U.S. economy.
"It is becoming increasingly clear that Germany cannot decouple itself from developments in the world economy", said Rainer Sartoris at HSBC Trinkaus & Burkhardt.
Today's data, and the disappointing figures that preceded it earlier in the week, will not be enough to persuade the European Central Bank to reduce interest rates tomorrow, however.
"The ECB will not be impressed by a single figure from Germany", said DKW's Guntermann. "They are looking at the current inflation rate and that unfortunately has been going up", he said.
The ECB has indicated it will not cut interest rates until euro zone HICP inflation dips towards the stability ceiling of 2 pct, despite the economic slowdown.
Economists said the task of helping the German economy through the current slowdown is the responsibility of the German government, rather than that of the ECB.
Julian von Landesberger, economist at HypoVereinsbank, said the government has failed to make necessary labour reforms to stimulate the economy.
"Today's figures are in a way punishment for the government which has failed to push ahead with reforms when there was good growth last year"
"If the ECB did make a move to counter what is a largely German phenomenon it would create a very bad impression. It is up for Germany to fix its economy", he said.
With an election due next year, however, economists said there is little chance of chancellor Gerhard Schroeder making potentially controversial labour market reforms.
"In Germany the problem is that an election is always round the corner", von Landesberger said.