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By Dave Graham
BERLIN, Feb 13 (Reuters) - The German economy -- Europe's biggest -- shrank at a record pace in the last quarter of 2008 as global demand for its manufacturing exports sank and dented investment, pointing to an unprecedented slump this year.
German gross domestic product (GDP) contracted by a bigger-than-expected 2.1 percent quarter-on-quarter in the final three months of last year, its worst quarterly performance since reunification in 1990, preliminary data showed on Friday.
The weak showing was led by a decline in investment and net trade, the Federal Statistics Office said, suggesting figures for the euro zone may also disappoint later on Friday.
"This number makes it plain that we're in a very serious recession -- the most serious since World War Two," said Dirk Schumacher, an economist Goldman Sachs in Frankfurt.
Economists polled by Reuters last week had forecast GDP would contract by 1.8 percent on the quarter. Since 1990 Europe's largest economy had never contracted by more than 1.2 percent in a quarter, according to Bundesbank data. The latest figures prompted economists to scale back expectations for 2009.
The October-December period was the third quarter in a row in which the economy shrank. Government officials have already said further contraction is likely in the first quarter of 2009.
Economists said a rise in inventories in the fourth quarter -- which bolstered the GDP numbers -- was not a good sign.
"A likely run down in stocks after year-end will put an additional burden on growth," said Alexander Koch at UniCredit.
Year-on-year, the economy shrank by 1.6 percent after growing by 1.4 percent in the July-September period.
INDUSTRY IN FREEFALL
Industry orders and output posted their biggest annual falls since reunification in December as demand for manufactured goods crumbled. Engineering orders fell at their sharpest pace in 50 years in the fourth quarter, industry group VDMA said.
Exports, for years a mainstay of growth, suffered a record fall in November and fell further in December. The downturn is increasingly spilling over onto the domestic economy. Unemployment is on the up again, and expected to climb fast.
German tourism and retail group Arcandor on Thursday dropped its full-year 2008/09 outlook, saying the financial crisis had made the future hard to predict.
"Nobody can say what next week or the week after will bring," Chief Executive Thomas Middelhoff said, noting the firm's sites near large automotive suppliers had been hard hit.
Cars sales have slumped by nearly a quarter globally, and many major German carmakers have cut back production.
Alexander Krueger, an economist at Bankhaus Lampe, said the data was so poor the bank now saw the economy shrinking 3.6 percent in 2009 -- having previously predicted a contraction of 2.5 percent.
"Downward risks predominate. There can be no talk of economic recovery for now," he said.
The German economy has never contracted by more than one percent in a year since the end of World War Two.
Nevertheless, there are some hopeful signs.
Germany's VDIK auto import association said on Thursday new car registrations in the first quarter of 2009 could rise at a double-digit rate on the year, and that government stimulus plans were already having a positive impact on demand.
Moreover, the Ifo institute's gauge of German corporate sentiment unexpectedly rose for the first time in eight months in January, lifted by firmer business expectations. (Additional reporting by Paul Carrel; Editing by Ruth Pitchford)