Germany's Bundesbank cut its growth outlook on Friday and now expects the euro zone's largest economy to barely grow in 2013, while it also pointed to risks of a recession as the euro zone debt crisis takes its toll.
The Bundesbank expects Germany's economy to grow just 0.4 percent next year, down from an earlier forecast in June of 1.6 percent.
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The move comes a day after the European Central Bank cut its forecasts for next year, pointing to weaker growth prospects for the bloc's core countries such as Germany, France and the Netherlands.
Germany has been a key growth driver of the euro zone, now in its second recession since 2009, but the country's resilience to the crisis is wearing thin and the central bank's new projections reflect this.
"Given the difficult economic situation in some euro-area countries and widespread uncertainty, economic growth will be lower than previously assumed," the Bundesbank said.
The euro fell to a session low against the dollar and German Bunds reversed earlier losses as a result.
"The Bundesbank is quite negative about next year," said ABN Amro economist Aline Schuiling. "What we are currently seeing is more and more evidence that the global industrial cycle is bottoming out."
The Bundesbank said the balance of risks was on the downside and said there was a chance of Germany entering a recession - defined as two consecutive quarters of negative growth.
"There are even indications that economic activity may fall in the final quarter of 2012 and the first quarter of 2013," it said.
Economists expect the German economy to contract in the fourth quarter but to improve as soon as in the first quarter.
Industrial orders and output have dropped in recent months, with exports falling at their fastest pace since late last year. But some data over the past weeks was encouraging, with German business morale rising for the first time in seven months and unemployment gaining much less than expected.
"The Bundesbank does not see a protracted slowdown but instead anticipates a return to growth path soon," it said, adding that it expects 2014 growth of 1.9 percent.
The Bundesbank sees inflation above 2 percent this year and falling to 1.5 percent next year, having earlier expected inflation of 2.1 percent this year and 1.6 percent in 2013. In its first take on 2014 inflation, it estimated prices to rise 1.6 percent that year.
(Reporting By Eva Kuehnen and Sakari Suoninen; Editing by Hugh Lawson)