BERLIN (Reuters) – Plunging car production drove an unexpected drop in German industrial output in January, as the engine room of Europe’s largest economy stuttered on trade tensions and unease about Brexit.

A global slowdown, tariff disputes sparked by U.S. President Donald Trump’s ‘America First’ policies and a potentially chaotic British departure from the European Union threaten to bring a decade-long expansion in export-reliant Germany to an end. Its economy only narrowly avoided recession last year.

The same factors are impacting the rest of the EU, and Monday’s data added weight to a dovish policy shift by the European Central Bank last week as safe-haven bonds rose.

“Industrial production is hard data and it is really cementing the impression that the European economy is slowing down,” said Mizuho rates strategist Antoine Bouvet.

“It is lending credibility to the view that the slowdown is not temporary.”

German business daily Handelsblatt said on Monday the federal government had cut its in-house GDP growth outlook to 0.8 percent for 2019, the second reduction in less than two months.

Industrial output dropped 0.8 percent, well below market expectations for a rise of 0.5 percent, Germany’s Statistics Office said.

The figure for December was sharply revised up, however, to a 0.8 percent increase from a previously reported 0.4 percent drop, and the euro recovered ground after a brief dip.

GATHERING CLOUDS

Automobile production fell by 9.2 percent on the month in January, separate data from the Economy Ministry showed.

It blamed special factors such as strikes at suppliers and a switch to new brands for the weak performance, though German carmakers are also at the sharp end of a sectoral dip driven by a slowdown in China, a plunge in demand for diesel vehicles and costly investments in electric as well as self-driving cars.

“The headwinds from abroad are hitting the German economy particularly hard,” Sophia Krietenbrink from the DIHK Chambers of Industry and Commerce said.

Seasonally adjusted exports were flat month-on-month in January – compared to a forecast 0.5 percent contraction – while imports rose 1.5 percent, the data showed. That meant the trade surplus narrowed to 18.5 billion euros ($20.80 billion).

The unexpectedly weak data suggests the German economy is likely to post only meagre growth in the first quarter after it barely avoided a recession – defined as two consecutive quarters of contraction – in the second half of last year.

Citing a finance ministry document, Handelsblatt said Berlin had cut its growth forecast internally due to a weakening world economy, risks from escalating global trade conflicts, and political factors including Brexit and Italy’s stretched finances.

The German government had already cut 2019 growth expectations in January to 1.0 percent from 1.8 percent.

The slowing economy means tax revenues are likely to be lower than expected this year, which could increase tensions in Chancellor Angela Merkel’s governing coalition over spending priorities.

Ralph Solveen from Commerzbank forecast modest first quarter GDP growth “because car production is likely to rebound.”

ING economist Carsten Brzeski said that the sharp revisions of monthly data, stabilising domestic orders and solid fundamentals suggested the industrial slowdown was reaching its low point.

“But if the search for a bottom takes too long, the German government should start considering additional fiscal stimulus,” he said.

($1 = 0.8893 euros)