By Joseph Nasr

BERLIN (Reuters) - German industrial production fell the most in 23 months in July, data showed on Wednesday, another sign that Europe's largest economy is set for a slowdown.

Wednesday's data, published one day after a surprisingly weak rise in industrial orders, added to worries that the German economy is losing steam, as exports suffer from lower demand in emerging markets and concern grows about Britain's decision to leave the European Union.

"Companies in the industry sector continue to adopt a wait- and-see approach because of sluggishness in the global export markets," the Economy Ministry said in a statement.

Industrial output fell by 1.5 percent in July from June, the data showed, far below the consensus forecast in a Reuters poll for an increase of 0.2 percent.

Construction's 1.8 percent increase in output and energy's 2.6 percent surge were not enough to offset a 2.3 percent drop in manufacturing activity, the data showed.

In the less volatile two-month comparison, industrial output was nearly flat, falling 0.1 percent in June and July.

ING economist Carsten Brzeski said no single factor caused the stagnating industrial output.

"The trend already started long before the British referendum, but clearly the Brexit vote should have been one of the main drivers behind the sharp July drop," Brzeski said.

"More generally speaking, the German industry seems to suffer from weaker activity in China, struggling euro zone peers and a general shift away from manufacturing towards services."

Nordea Bank analyst Holger Sandte pointed to the same structural change in the world economy.

"This is more proof that the manufacturing sector is no longer a driver of growth in a world that is increasingly dominated by services," Sandte said. "The German economy maybe needs to adapt more to this."


The government expects the economy to expand by 1.7 percent this year, comparable to last year, when private consumption and state spending provided most of the impetus. For 2017, the government forecasts a slowdown to 1.5 percent as weaker exports hit manufacturers, historically a pillar of the economy.

With private consumption showing signs of slowing, the government is facing louder calls to increase investment on education, infrastructure and high technology.

Critics say Chancellor Angela Merkel, now over a decade in power, has benefited from reforms enacted by her Social Democrat predecessor, Gerhard Schroeder, and accuse her government of complacency on the economy.

The Social Democrats, coalition partners of Merkel's ruling conservatives, have made increasing investments the centerpiece of their election campaign a year before a federal vote.

Finance Minister Wolfgang Schaeuble, a conservative, has promised tax cuts for low- and middle-income households after the 2017 election. But he has ruled out new debt to finance investments, sticking to his balanced budget policy until 2020.

The government wants to reduce total public debt in 2020 to less than 60 percent of gross domestic product - a criterion set out in the EU's Stability and Growth Pact - for the first time since 2002.

That goal "is not an end in itself," Merkel told the lower house of parliament on Wednesday. "It's about giving room for maneuver to those who will draw up budgets after us - and not letting debt increase further."

Economists, including a panel of so-called wise men who advise the government on policy, disagree.

Rather than promising tax cuts, ING's Brzeski said, the government should invest more in education and high technology infrastructure, which would act as "instruments to boost long-term growth rather than providing short-term stimulus".

(Additonal reporting by Michael Nienaber; Writing by Joseph Nasr; Editing by Larry King)