BERLIN (Reuters) - Germany's services sector sharply lost momentum in September as new business fell for the first time since late 2014, a survey showed on Thursday, fuelling fears that a manufacturing crisis is spilling over to other parts of Europe's largest economy.
IHS Markit's final services Purchasing Managers' Index (PMI) dropped to 51.4 from 54.8 in August. It was the lowest reading in three years and came in weaker than the first estimate of 52.5.
"A technical recession now looks to be all but confirmed," IHS Markit economist Phil Smith said, pointing to expectations that the German economy will shrink again in the third quarter after having contracted by 0.1% in the second quarter.
"The drop in new business at services firms is an indication that domestic demand is struggling to offset the loss of new work from abroad, and is a downside risk to the sector's immediate growth prospects," Smith added.
German services providers continued to hire new staff, however, with employment growth still surpassing the long-run average of the survey, according to IHS Markit.
"The worry is, though, that staff shedding across manufacturing could soon outweigh the employment growth in the service sector," Smith said.
IHS Markit's flash composite PMI, which tracks the manufacturing and services sectors that together account for more than two-thirds of the economy, fell to 48.5 in September from 51.7 in the previous month.
It was the first time since April 2013 that the composite index fell below the 50 mark that separates growth from contraction and was below the flash reading of 49.1.
Germany's leading economic institutes on Wednesday slashed their growth forecasts for Europe's biggest economy for this year and next, blaming weaker global demand for manufacturing goods and increased business uncertainty due to trade disputes.
The institutes said they now expect the German economy to grow by 0.5% this year and 1.1% in 2020, down from their April estimates of 0.8% and 1.8% respectively.
The German government is expected to update its economic growth forecasts later this month.
(Reporting by Michael Nienaber; Editing by Catherine Evans)