The eurozone economy slumped by a record 2.5 per cent in the first three months of the year, dragged down by Germany, which recorded the biggest drop in its GDP in nearly 40 years.

The German economy, the engine room of the 16-nation eurozone, contracted by 3.8 per cent in the first quarter of the year, battered by the fall in demand for manufactured goods. This was the biggest drop in German GDP since records began in 1970 and followed a 2.2 per cent decline in the final quarter of last year.

According to official data from Eurostat, the weakness in the eurozone economies was widespread, with Austria and the Netherlands suffering a 2.8 per cent drop in GDP. France, the second-largest eurozone economy, was slightly more resilient, contracting by 1.8 per cent, but the country has officially entered recession. The eurozone economy, which shrank at an annual rate of 4.6 per cent in the first quarter, has been in recession for a year.

The whole of the 27-nation European Union saw its GDP fall 2.5 per cent on the quarter and 4.4 per cent year-on-year.

Despite the dismal figures, Dominique Strauss-Kahn, the head of the International Monetary Fund (IMF), said that he expected the global economy to recover in the first half of next year. However, he said that banks’ balance sheets would have to be cleansed before recovery would take hold.

The European Commission said that the worse than expected figures did not alter its view that the eurozone economy would stabilise this year before gradually recovering next year.

Yesterday’s figures highlighted the fact that Germany has been one of the biggest casualties of the global downturn among developed economies. IMF predictions made earlier this year that the UK would be the sick man of Europe look wide of the mark, as Britain’s economy shrank by 1.9 per cent in the first three months of the year. The US economy shrank by 1.6 per cent in the same period. But there are signs that the worst may be over. Recent indicators from Germany and elsewhere in the eurozone indicate an easing in the pace of the slowdown.

However, unemployment will continue to soar, bringing more pain, analysts said. Ken Wattret, chief eurozone market economist for BNP Paribas, said: “While the leading indicators are improving, the worst of the news on unemployment is by no means behind us. It will continue to worsen for some time to come.”

There was more hopeful news from across the Atlantic as the pace of the decline in US industrial production continued to ease. Industrial output fell 0.5 per cent in April, after a 1.7 per cent decline in March, according to the Federal Reserve. US factories are operating at record low levels of capacity, the figures also showed. The capacity utilisation rate for industry fell to 69.1 per cent in April, the lowest level since the Fed began compiling data in 1967. Inflation dropped for the second month in a row, with the annual fall in consumer prices dipping to 0.7 per cent, from 0.4 per cent.

Worries about a damaging deflationary spiral were offset as core inflation, which strips out volatile food and energy prices, rose by 0.3 per cent on the month, taking the annual increase to 1.9 per cent, from 1.8 per cent.

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