Germany's powerful manufacturing sector, the engine room of the European economy, tipped closer to recession Tuesday after a much weaker-than-expected reading of industrial output for the month of November.

Industrial production in German, the region's biggest economy, fell 1.9% in November, the Federal Statistics Office said, following on from a downwardly revised reading of 0.8% in October. In fact, the November decline was the third consecutive monthly contraction, as export orders new investment continues to suffer amid the uncertainty of both China's economic slowdown and the myraid trade disputes between Washington and allies and rivals around the world.

The slump also raises the very real prospect of recession in Germany, after third quarter growth surprising contracted by 0.2% in the three months ending in September, the first since 2015, thanks to what officials called "foreign trade developments".

"At face value, today's industrial production data has clearly increased the risk of a technical recession in Germany in the second half of 2018," said ING's chief economist for Germany Carsten Brzeski. "Watch out for tomorrow's trade data. Another disappointment, combined with the high inventory build-up in 2Q and 3Q, would clearly increase the likelihood of a technical recession."

"On the other hand, private and public consumption still have the potential to offset recession forces," he added. "The recent pick-up in orders in the automotive industry and favourable financing conditions in the entire economy also bode well for at least solid industrial and investment activity in 2019."

The slowing momentum in Germany also put pressure on broader optimism around the Eurozone, where the European Commission's benchmark economic sentiment index slipped to 107.3 points last month from a November reading of 109.5 points, notching the 12th consecutive monthly decline. 

Reaction to the data was mixed, with the DAX performance index in Frankfurt rising 0.5% alongside broader gains for European equities, while benchmark 10-year German bond yields rose 3 basis points to trade at a one-month high of 0.24%.

However, the softening data was met with cautious concern by Germany's Economy Minister Peter Altamier, who told German broadcaster ARD that "my role is not to badmouth the good current economic mood but to contribute so that there are more investments in Germany and new jobs are created." 

Germany's jobless rate fell to 5.2% across the whole of 2018, the Federal Labor Agency reported last week, the lowest since the country's reunification in 1991. 

One difficultly the economy could face in the coming months, however, is the prospect of higher government borrowing costs around the Eurozone, the economic bloc that uses the single currency and the ultimate destination of most of its exports, as a result of the European Central Bank's decision to end its bond buying program last month.

The ECB will continue to invest the proceeds of its €2.4 trillion balance sheet, but won't add new bond purchases as it seeks to slowly normalize monetary in the currency area after more than three years of negative interest rates and extraordinary liquidity support. 

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