Grim output data deepens euro zone recession fears

ROME (Reuters) - Industrial output falls in the euro zone's three largest economies in September strengthened the view that the bloc is already in a recession which may be deeper than expected and will last through most of 2009.

France's output drop of 0.5 percent looked almost healthy compared with the record declines of 2.1 percent in Italy, which also reported on Monday, and 3.6 percent reported on Friday by Germany, the area's largest economy.

Bank of America economist Gilles Moec said the latest figures suggested the euro zone ground to a halt earlier than previously thought and there was a possibility of at least five consecutive quarters of negative growth.

"The basic idea was that we had stagnation, and then the credit crunch in September and October would turn it into recession, but the figures we are seeing now suggest things turned sour earlier than we thought," he said.

"What we are faced with now is something close to the 1992/93 recession, and it could possibly be even worse."

The three nations make up more than two thirds of the euro zone economy.

Output in both France and Italy was weighed down by a sharp decline in car manufacturing, a sector hard hit by the credit crunch and the downturn in consumer demand.

The 0.2 percent euro zone growth contraction between April and June was the first since monetary union was launched, and even before the latest output figures analysts polled by Reuters were forecasting a third quarter contraction of the same size.

Analysts define recession as two consecutive quarters of negative growth.

Italy's output drop was the steepest since December 1998, pointing to a recession which analysts said could prove long and deep for an economy which has been one of the euro zone's most sluggish growth performers for at least a decade.

A Reuters poll had projected a 1.6 percent output drop, but analysts said a sharp downward revision to August's data shed an even worse light on the September data.

"The problem is that the indicators for October are worse than for the third quarter, I fear the fourth quarter may be worse than the third," said Marco Valli of Unicredit MIB.

He forecast Italian GDP would fall 0.4 percent in the third quarter after the 0.3 percent drop in the previous three months, while euro zone growth would contract by 0.1 percent when preliminary data is published on Friday.

On Wednesday, Eurostat will publish industrial output data for the 15 nation bloc, which now looks likely to come in below the -1.3 percent forecast in a Reuters survey last week.

After the latest data, Morgan Stanley's Maryse Pogodzinski forecast a 1.8 percent monthly fall.

France's 0.5 percent output drop was broadly in line with expectations but followed a 0.4 percent decline in August.

"All of this data is consistent with an economy in recession in the way we imagine it," said Alexander Law, chief economist at Paris-based consultancy Xerfi.

"Total output of the economy, that is GDP growth, is going to be negative in the third quarter and it looks very much like we're heading that way also for the fourth quarter," he said.

Germany's 3.6 percent output drop reported on Friday was the largest for almost 14 years, but followed a 3.2 percent jump in August.

In Italy, output weakness extended to virtually all product groups, while in France the sharpest drop was in the automobile sector, which reported a 3.1 percent decline.

Like their counterparts worldwide, French carmakers have been hit by sharp falling demand, with little sign of improvement.

The country's two main automobile groups, Renault and Peugeot, have both been forced to shut plants temporarily and stand workers down, pointing to even sharper production declines in the next few months.

(Editing by Ron Askew)