German industrial output was unchanged in January, undercutting expectations for a slight rise and compounding concerns that the eurozone’s largest economy will not rebound as strongly from contraction as sentiment indicators have suggested.

Economists still see the country escaping a recession... German growth is crucial to underpin the struggling eurozone economy

The output data, coming on the heels of figures showing industry orders unexpectedly fell in January, pointed to the continuing weakness of the economy after it shrank in the last quarter of 2012.

The mid-range forecast in a Reuters poll of 40 economists had been for output to rise 0.5 per cent, after an upwardly-revised 0.6 per cent increase in December.

“Soft data for the German economy has been more than encouraging for already several months. Now, the first batch of hard data for the start of the year sends mixed signals,” said ING analyst Carsten Brzeski.

“While the solid labour market and a sharp increase in retail sales in January already confirmed the growth-supportive role of consumption, the strengthening of industrial activity remains a very gradual and choppy one,” he said, adding that this pointed to “some kind of rebalancing” of the economy.

Friday’s Economy Ministry data showed construction output increasing three per cent on the month, compensating for falls in energy and manufacturing of 2.3 and 0.2 per cent respectively.

Europe’s economic powerhouse expanded robustly during the first two years of the eurozone crisis but growth slowed last year and the economy shrank 0.6 per cent in the fourth quarter.

Most economists still see the country escaping a recession, defined as two consecutive quarters of contraction, by growing weakly in the first quarter before regaining momentum. German growth is crucial to underpin the struggling eurozone economy.

“We remain fundamentally of the view that German gross domestic product will rise in the first quarter, but we do see the risk at the moment that it will come in below our forecast of 0.3 per cent,” said Thilo Heidrich, an economist at Postbank.

Recent forward-looking sentiment indicators have shown German companies, investors and consumers becoming more optimistic, while unemployment dropped in February.

But the Markit purchasing managers’ survey has consistently shown the service sector recovery outpacing manufacturing over the past year. The manufacturing industry expanded for the first time in a year in February, according to Markit.