ALPEN, Germany (Reuters) - The ploughs that made German farm machinery firm Lemken its name line the factory forecourt like a row of modernist sculptures, with jutting spokes and sinister-looking blades.
Based in an agricultural region close to the Dutch border, this is an archetypal German "Mittelstand" company, family-owned over seven generations and still catering to the same farmer clientele served by its founder, blacksmith Wilhelmus Lemken, in 1780.
But after strong growth last year, Lemken, like the wider German economy, is losing its immunity to the debt crisis sweeping Europe and beyond, devouring investor confidence in its wake.
Sales will slow sharply in the second half of the year, as European markets shrink or stagnate and the pace of growth stalls in emerging economies which helped power record German exports in 2011.
"Farmers, our customers, worry like every other citizen about the scale of the crisis and the chances of recession," Lemken chief executive Franz von Busse told Reuters from his modern office in the flat Alpen countryside.
"This affects their willingness to make major investments in agricultural machinery like ploughs."
He expects sales to fall 5 percent in the second half of 2012, after rising 15 percent in the first, giving an annual rise of just 5 percent and mirroring a broader slowdown in Germany's agricultural machinery sector.
The looming slowdown in Europe's powerhouse economy is a blow for the continent's recovery hopes. A lengthy period of stagnation or worse beckons if the debt crisis deepens.
Recent economic reports point to rapidly deteriorating sentiment among German businesses as new orders falter and frustration at political inertia over the crisis mounts.
A survey of purchasing managers showed Germany's factory output contracted at its fastest pace in nearly three years in May. Closely watched business sentiment surveys from the Ifo and ZEW think tanks have also slumped.
The reports show building firms with a high reliance on public spending, and retailers, who depend on the mood of German consumers, are being hit hardest.
German healthcare firms such as Fresenius or Biotest have found themselves facing unpaid bills from Greek hospitals, for which they were given Greek government bonds, only to find these written down.
Elsewhere in the economy, growth is tailing off as order books take longer to fill.
"We will see a flattening this year. Growth is slowing as orders slow, but we should still see mild growth," said Arndt Kirchhoff, head of the Mittelstand division of the Federation of German Industry, and chief executive of an automotive company.
Germany remains in a better position than its European peers. Its firms have confidence in their products, if not in their political leaders, and are better positioned for external shocks, having reduced their exposure to Europe's crisis-hit periphery.
But the situation is beginning to look more fragile, with worrying implications for Europe. Germany's economic momentum will be a key factor in the duration and severity of the crisis.
POLITICAL INERTIA
In a recent study of 4,000 Mittelstand, or small and medium-sized firms, by Commerzbank, three in four said political uncertainty arising from the euro zone crisis was making it difficult to make plans, adversely affecting their business.
It is a frustration shared by Ralf Saatkamp, 33, founder of System Trailers GmbH, which makes commercial vehicle trailers.
"We see no solutions being put forward. Politicians just come up with ways to push problems aside for a time even if this actually increases them," said Saatkamp, who is also deputy president of Germany's Association of Young Entrepreneurs.
"Things improve for a few months but then deteriorate. I feel a big economic shake out is looming."
The crisis hasn't yet hit his orders, but could soon.
"As businesses we have to take responsibility for running a sustainable budget, keeping ourselves financed. If we can't then we shouldn't be running businesses. Governments need to display similar discipline."
The Commerzbank study showed two thirds of firms expect growth to weaken and a third worry about repaying loans.
Josef Schlarmann, a member of Chancellor Angela Merkel's Christian Democrats (CDU), and head of the party's Mittelstand wing, acknowledges political intransigence is souring sentiment.
But he urged firms to separate fears of what may happen from what is actually is happening.
"Expectations reflect all kinds of psychological factors. In politics there are many things which leave little room for optimism. We have fears about the euro zone crisis, changing energy policy. Firms reading about this and feel anxious."
"But the opposite could happen. We could see economic activity focusing in northern and central Europe, with business transferring from the periphery. That would benefit Germany."
"MADE IN GERMANY"
While the immediate prospects are increasingly uncertain German manufacturers still expect stronger demand for the "Made in Germany" label in future.
Businesses say they are better placed for rocky times ahead than during the 2009 downturn. Exporters now earn only one euro in every ten from Greece, Portugal, Italy and Spain, and firms are now less dependent on loans.
Saatkamp for example is dealing with Kazakhstan and Poland and has avoided southern Europe altogether.
Another factor is that unlike in 2009, consumer demand in Germany is holding. Hefty wage hikes for workers should spur more spending and Berlin is under pressure to encourage wary Germans to consume more freely to help euro zone partners.
At Lemken, given the world's mounting food needs, demand for more intensive farming, and farmers' higher investment power as food prices rise, the long-term prospects are brighter.
"We learned lessons from the 2009 financial crisis and we have exposure to a range of markets. We don't see any need to reduce working hours. But we also are sure we can react rapidly if necessary," Von Busse added.
"We can't compete on price. So we have to be ahead with the technology and the quality."
Like Lemken the German economy staged a strong recovery from the global financial turmoil. It grew 3 percent in 2011, and an enviable 3.7 percent in 2010. The first quarter of 2012 was surprisingly strong at 0.5 percent, even if the Bundesbank sees GDP rising a modest 0.6 percent this year.
EYES OPEN
Moreover, Germany does not look set to suffer a liquidity crunch like some of its peers or indeed like it did during financial crisis.
A study released this month by trade credit insurer Atradius showed that as much as 30 percent of bills are now paid late by Germany's business customers in Western Europe due to liquidity problems, creating squeeze for those trying to recover their debts.
But Andreas Tesch, chief market officer at Atradius, notes firms are better prepared now.
"I think the difference between now and the previous global financial crisis is that we are entering this with our eyes wide open. After the collapse of Lehman Brothers things came to a very abrupt standstill. We have learned lessons and our clients are better prepared," he added.
Credit markets shows German firms still in an enviable position.
Books on bond issues have been oversubscribed, allowing companies and bankers to price aggressively despite only offering slim coupons and meager new issue premiums over outstanding bonds.
Five-year credit default swap levels - or the cost of insuring debt - for carmaker BMW actually fell from around 150 basis points to around 140 basis points since the beginning of the year.
Those for Volkswagen have fallen from around 170 basis points to around 165 bp over the same period. By comparison CDS for Italian rival Fiat SpA currently trade at around 950 bps.
But even in Germany's flagship industry, all is not well. Car sales started to slip in May, shrinking 7 percent after a 3 percent gain in April.
And the true hit from Europe's economic woes may be far deeper. Automakers and dealers have taken to registering new vehicles in their own name to offset waning household demand.
These cars are then sold at a deep discount as "used cars".
"Europe should quickly reach a common strategy how to solve the debt crisis," the auto industry's chief lobbyist, VDA President Matthias Wissmann, said.
(Additional reporting by Josie Cox in London; Editing by Noah Barkin and Giles Elgood)