Euro zone factory output falls again, recovery far off

BRUSSELS Wed Dec 12, 2012 6:20am EST

A worker controls a tapping of a blast furnace at Europe's largest steel factory of Germany's industrial conglomerate ThyssenKrupp AG in the western German city of Duisburg December 6, 2012. REUTERS/Ina Fassbender

A worker controls a tapping of a blast furnace at Europe's largest steel factory of Germany's industrial conglomerate ThyssenKrupp AG in the western German city of Duisburg December 6, 2012.

Credit: Reuters/Ina Fassbender

BRUSSELS (Reuters) - Euro zone factory output continued its steep fall in autumn this year, underscoring the feeble domestic demand that risks prolonging the bloc's recession.

Industrial production in the 17 countries sharing the euro fell 1.4 percent in October after falling sharply percent in September, the EU's statistics office Eurostat said on Wednesday. That was much worse than the modest growth expected by economists in a Reuters poll.

Factories had proved surprisingly resilient over the European summer, posting two months of moderate gains, but the new data supports forecasts of a third quarterly contraction in the euro zone's economy in the October-to-December period.

After three years of a debt crisis that has driven unemployment to a record level and pushed governments to slash spending, the economy is caught in a spiral: households are not spending and so companies are not selling, forcing them to cut staff which then further weakens consumption.

"Domestic demand will only turn around when uncertainty among the companies about the fate of the euro has been dispelled, prompting them to increase investment again," Ralph Solveen, an economist at Commerzbank, wrote in a research note.

Policymakers in the euro zone, which generates a fifth of global output, are divided over the chances of an economic recovery next year but the European Central Bank has downgraded its forecasts for 2013 and expects any rebound to come in the second half of next year.

The bloc's 9 trillion euro economy is likely to contract at least 0.4 percent this year, marking its second recession since 2009 and contrasting with the United States and much of Asia and Latin America, where growth is gradually returning.

The ECB held off from another cut in the cost of borrowing at its Governing Council meeting last week, but could take its interest rate to below the current 0.75 percent level in 2013, as inflation falls towards its target.

LOW POINT?

Germany, France and Italy, which make up two-thirds of the euro zone's industrial production, all saw their factory output contract for the second consecutive month in October, with Germany, the euro zone's biggest economy, falling the most.

At the euro zone level, only production of consumer goods such as food and cosmetics rose in October, with all other sectors falling. Output of cars, electronics and furniture fell almost 4 percent.

Automakers Peugeot (PEUP.PA), Ford (F.N) and General Motors (GM.N) have announced a total of 16,500 job cuts in Europe over the past two months, while companies ranging from Spanish airline Iberia to French telecoms equipment group Alcatel Lucent (ALUA.PA) have also said they will cut staff.

Investors and businesses are hoping the slump is reaching its lowest point. Business surveys over the past few weeks show euro zone manufacturing may be ready to rebound, with managers reassured by the ECB's plan to buy the bonds of euro zone countries in trouble, dramatically reducing the chances of a collapse of the currency area.

"The figures published today are very bad, but the good news is that the recession in Europe has probably hit the lowest point and a recovery might start from the second quarter of 2013 onwards," said Peter Vanden Houte, an economist at ING.

Much uncertainty for businesses remains. The European Union is struggling to agree on a banking union, the first step in a new phase of integration meant to underpin the euro.

Italian Prime Minister Mario Monti's decision to leave office early also illustrates the fragile political situation in the euro zone's third largest economy.

"A lot of things can still go horribly wrong," Vanden Houte said.

(Reporting by Robin Emmott; Editing by Rex Merrifield and Catherine Evans)

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Comments (1)
dareconomics wrote:
Full post with charts here:

http://dareconomics.wordpress.com/2012/12/14/eurozone-still-contracting/

The latest data from Markit, an economics service based in London, shows that the Eurozone remains in recession. Since the economy is contracting at a slightly slower rate, it has been spun as good news. The chart above tracks both Flash PMI and Eurozone GDP. Usually, they correlate very nicely, but there has been a divergence in the last few months. Usually, when this happens GDP takes a turn for the worse. With the the situation in the periphery, I see Eurozone GDP getting worse before it gets better.

The problem is that the whole Eurozone is contracting while Germany treads water:

German money is supposed to pay for bailouts, fiscal unions and banking unions in the near future. Germany and the rest of the FANG are not as strong as they need to be to support the whole Eurozone. If you think German money will save the Eurozone after Merkel wins the election, thing again.

Consumer spending continues to fall as evidenced by a 10% decrease in car registrations. Consumers compose the lion’s share of economic growth in modern, Western economies accounting for about 70%. Europhiles keep pointing to the increase in exports in Spain and even Greece has showing that the worst is over. However, even a huge increase in exports cannot fill the whole in economic growth left by the struggling European consumer.

For example, combined trade between the eurozone and the U.S. and China is running at a €521bn annual clip. A healthy 10% rise in exports to these two countries would add 0.04% in growth next year to Eurozone GDP.

The EU may have declared a two-front victory in its eurocrisis fighting efforts by temporarily arresting Greece’s fall to oblivion and issuing happy-talk about a banking union, but winning a battle or two does not ensure victory in the war.

Dec 14, 2012 1:20pm EST  --  Report as abuse
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