Factory output drags on euro zone's economy

BRUSSELS Thu Jul 12, 2012 6:39am EDT

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BRUSSELS (Reuters) - Euro zone factories unexpectedly stepped up production in May, but output fell in France and the Netherlands in a further sign that the bloc's sovereign debt crisis is also hurting its stronger economies.

Industrial production in the 17 countries sharing the euro rose 0.6 percent in May from April, the EU's statistics office Eurostat said on Thursday, beating expectations of economists polled by Reuters, who had forecast no growth in the month.

But Eurostat revised downward the reading for April to a 1.1 percent drop from a 0.8 percent decrease, the deepest fall so far this year, highlighting the crushing effect that the 2-1/2 year debt crisis has had on consumer and corporate demand.

"May's increase does not alter our view that the sector will continue to act as a drag on overall economic growth," said Ben May, a economist at Capital Economics in London.

"With the weakening business surveys pointing to more rapid rates of decline, we would not be surprised if production fell again in June," he said, forecasting a contraction in second quarter gross domestic product in the euro zone.

A fall in energy production in May for the euro zone as a whole appeared to explain the modest reading as output rose for capital goods, such as machinery to make other products.

Industrial output fell 2.1 percent in France in May, a drop second only to Slovenia's 3.2 percent slide.

Production also fell in the Netherlands, where GDP is expected to shrink 0.9 percent this year, according to the European Commission and making it the worst performing economy in the euro zone's wealthy, northern core.

"Modest annual declines in production in Germany, the Netherlands and Finland suggest that all is not well in the core countries," said Martin van Vliet at ING, adding that with no growth in industrial output in June, the sector's performance will likely knock at least a 0.1 percentage point off GDP.

FRENCH JOB LOSSES

Led by France, EU leaders agreed at a summit last month to inject 120 billion euros ($145 billion) into the European economy to counterbalance public sector layoffs and cuts in spending to bring budget deficits down to sustainable levels.

But with the euro zone crisis also weakening business confidence in China, the United States and other major economies, that plan may not be enough, especially when only 60 billion euros will be available quickly.

In another attempt to revive the economy, the European Central Bank cut interest rates to a record low of 0.75 percent this month, making it cheaper for the euro zone's hard-pressed households and firms to borrow.

The outlook is poor for France in particular, after French carmaker PSA Peugeot Citroen announced on Thursday 8,000 job cuts and the closure of an assembly plant as it struggles with mounting losses.

Germany, Europe's largest economy, has shown the most resilience to the debt crisis and the International Monetary Fund expects it to grow 1 percent this year, better than the stagnation most economists see for the euro zone as a whole.

But while German factories increased production by 1.5 percent in May, it was still not enough to compensate for a 2 percent fall in April. Italy painted a similar picture, rising 0.8 percent in May after also falling 2 percent in April.

"German exports should climb again in the coming months, as we do not expect global demand to slump. That said, the German upswing has lost momentum amid the crisis in the euro zone," Ulrike Rondorf, an economist at Commerzbank, wrote in a note to clients last month on the German export outlook.

Ireland, which the euro zone is eager to hold up as a success story after Dublin took a bailout in 2010, notched up its third consecutive month of solid output gains, with industrial production rising 1.4 percent. ($1 = 0.8164 euros)

(Reporting by Robin Emmott; editing by Rex Merrifield/Ruth Pitchford)

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