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A container ship is loaded in Hamburg. Germany’s economy slowed to a crawl in 2012, according to data released Tuesday.FABIAN BIMMER/Reuters

Europe's three-year-old crisis has taken a steep toll on Germany, but signs are already pointing to a modest recovery that would keep the region's powerhouse economy out of recession this year.

Germany's economy slowed to a crawl in 2012, according to data released Tuesday, as the festering financial crisis in the 17-nation euro zone infected the strongest core economy.

Gross domestic product expanded by a mere 0.7 per cent last year, down sharply from 3 per cent the previous year and 4.2 per cent in 2010. That trajectory illustrates the damage to Germany from the crisis, which has plunged a large swatch of Europe into recession.

Based on the preliminary annual data, the German economy may have shrunk by as much as 0.7 per cent in the fourth quarter from the previous quarter, led by weaker industrial output, falling domestic demand and slower exports.

The crisis is shouldering part of the blame for reduced business investment and lower export growth. But even as Germany's economy shifted into reverse in late fall, business sentiment and other indicators were pointing to better times, though modestly so.

"That there was a dip [in GDP] is not a surprise. The extent was somewhat larger than I had anticipated," said Timo Klein, senior economist with IHS Global in Frankfurt. "But the pattern is such that at the same time we saw this worsening hard data, we have seen some leading indicators … rebounding."

Exports remain a key contributor to growth, public finances are in their best shape since before the global financial meltdown and the employment picture remains relatively healthy – a far cry from the soaring jobless rates afflicting most of its European partners.

Despite the pressures of the regional debt crisis, Germany eked out a budget surplus of 0.1 per cent of GDP, thanks in no small measure to record low interest rates stemming from the crisis and healthy employment gains, which have reduced government costs. The jobless rate, which had been declining steadily since mid-2009, has crept up slightly in recent months. But the labour force has also expanded, with a record number of Germans now at work.

"The economic recovery, the stable labour market and euro-crisis-driven record low interest rates have led to a further improvement of public finances in Germany," ING economist Carsten Brzeski said in a research note. "As a consequence, Germany has overachieved its own fiscal targets."

Analysts will get a better handle on the extent of the damage when the Federal Statistics Office releases revised quarterly data next month. Officials do not include a quarter-by-quarter breakdown in their initial annual assessment.

FSO chief Roderich Egeler told reporters the current estimate for the fourth quarter is a contraction of 0.5 per cent. Taking into account the FSO tendency to round preliminary figures to the nearest 0.5 per cent, the actual contraction could fall anywhere between 0.3 per cent and 0.7 per cent. Regardless, it amounts to the worst quarterly result since Germany plunged into recession during the global crisis of 2008-09.

The government is expected to slash its growth estimate for this year to 0.4 per cent, well below the current forecast 1 per cent.

Mr. Klein is forecasting calendar-adjusted growth this year of 0.9 per cent, which would match the adjusted 2012 total.

"This assumes that the dip in GDP [in the fourth quarter] will prove a one-off that is quickly overcome in the first quarter," he said.

A sturdy U.S. recovery and stable Chinese demand remain keys to Germany's economic prospects, he added. The world's two biggest economies combined account for a larger share of German exports than total sales to the most troubled regions of the euro zone.

"The German economy might not be an island of happiness any longer, but it remains at least an island of growth in a still recessionary euro zone sea," Mr. Brzeski said.