The German economy posted its biggest contraction since the Second World War last year as the global financial crisis engulfed Europe’s economic powerhouse, the nation’s statistics office said on Wednesday.

Europe’s largest economy shrank by 5 per cent last year in the wake of a plunge in both exports and investment after the implosion of the US investment bank Lehman Brothers in September 2008 sent the world economy into a tailspin.

“This was hopefully the last reminder of the severity of the recession,” said ING Bank economist Carsten Brzeski.

“The recession is yesterday’s story; today’s story is the ongoing recovery,” he said.

While exports tumbled by a price—adjusted 14.7 per cent last year, corporate investment slumped by a dramatic 20 per cent with private consumption posting a modest 0.4—per—cent increase, the statistics office said.

“As an export—dependent nation, Germany was especially hit by the world economic crisis,” said statistics office chief Roderich Egeler, releasing the data.

Analysts had predicted the economy would contract by 4.8 per cent last year after it grew by 1.3 per cent in 2008 and 2.5 per cent in 2007.

But Wednesday’s data also point to the nation’s economy slowing as 2009 came to an end with Mr. Brzeski saying growth may have been just 0.2 per cent in the fourth quarter.

However, the economy grew by 0.7 per cent in the third quarter after it emerged from recession in the three months to the end of June to post a 0.4—per—cent expansion rate.

“Slowly but surely we are establishing a more stable trend,” said Rainer Guntermann, senior economist with Commerzbank.

“The modest upward trend is likely to continue,” said Mr. Guntermann with Berlin’s 85—billion—euro (126—billion—dollar) emergency fiscal stimulus plan having helped to shield the nation’s economy from recession.

Business confidence rose for the ninth consecutive month in December, a key survey released last month said, adding to expectations that the recovery in the country will take hold in the coming 12 months.

But as evidence of the impact on the country’s public finances of the economic crisis, the nation’s budget deficit breached the strict 3—per—cent rule for euro member states for the first time since 2005 to edge up to 3.2 per cent of gross domestic product in 2009.

Amid signs that Germany’s recovery has been gaining traction, economists have in recent weeks raised their growth forecasts for the nation with many expecting the country’s expansion rate to top 2 per cent this year.

Wholesale and export association (BGA) predicted Tuesday that the economy could grow between 2.5 per cent and 3 per cent this year.

In addition, the government is expected to raise its present rather cautious 1.2—per—cent economic growth rate projection for 2010 when it unveils its next economic forecast later this month.

But the economy is still not firing on all cylinders with concerns that rising unemployment could dampen private consumption, consequently casting a shadow over the nation’s economic outlook in the coming months.

Weak private consumption could in turn undercut the country’s recovery from last year’s sharp economic downturn Moreover, this would leave Germany dependent on exports and the recovery in global trade as the driving force behind economic growth.