German debt crisis fears as exports fall

The Italian government, struggling to impose reforms, was hit by another set of poor data: industrial production fell 1.9pc - the third big fall in four months.

James Nixon, an economist at Societe Generale, said in a note that the data "already suggest that Italy is heading for another big fall in GDP in Q2 and could easily be on course to hit Confindustria's [the main organisation representing Italian manufacturing and services companies] forecast for a full one percentage point drop".

There was bad news in France, too, where the central bank cut its growth forecast for the second quarter to -0.1pc amid falling confidence. The Bank of France said business sentiment fell to 93 in May from 94 the month before. French business confidence hasn't risen all year.

Analysts at Charles Schwab in London said: "The European crisis continues to escalate and we are recommending that investors underweight European equities. Hopes of a sustainable solution in the near term are virtually nonexistent, while contagion fears are rising."

The data initially rattled markets. In early afternoon trading, the FTSE 100 fell 0.6pc, the French CAC lost 0.8pc, the German DAX dropped 0.5pc and the Italian MIB lost 1.1pc. The Spanish IBEX rose 1.1pc.

Meanwhile, the US trade deficit narrowed in April, as both imports and exports fell from record high levels set in March, in a sign of slowing global demand, a government report showed on Friday.

The gap shrank 4.9pc to $50.1bn (?32.5bn), as imports of goods and services dropped 1.7pc to $233bn, the US Commerce Department said.

Exports slipped 0.8pc to $182.9bn. Both imports and exports were still the second highest on record.

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