Euro zone industry stumbles in May, recovery still frail

BRUSSELS Mon Jul 14, 2014 6:20am EDT

A band-conveyor with iron ore for steel production is seen at Europe's largest steel factory of Germany's industrial conglomerate ThyssenKrupp AG in the western German city of Duisburg March 17, 2010.  Picture taken March 17, 2010.    REUTERS/Ina Fassbender

A band-conveyor with iron ore for steel production is seen at Europe's largest steel factory of Germany's industrial conglomerate ThyssenKrupp AG in the western German city of Duisburg March 17, 2010. Picture taken March 17, 2010.

Credit: Reuters/Ina Fassbender

BRUSSELS (Reuters) - Euro zone industrial production dropped sharply in May with only the energy sector thriving, another sign that the bloc's economic recovery remains fragile.

Output in the 18 countries sharing the euro dropped 1.1 percent on the month in May, following a 0.7 percent rise in April, data on Monday from the European Union's statistics office Eurostat showed. That was still less than the 1.2 percent monthly fall forecast in a Reuters poll ECONEZ.

Compared with the same period in 2013, factory gate output grew by 0.5 percent, in line with market expectations, after a 1.4 percent rise in April

"May’s sharp drop in industrial production highlights the lackluster and bumpy nature of the euro zone recovery," said Martin van Vliet, euro zone economist at ING Bank.

The month-on-month decline was led by a 2.4 percent fall in production of intermediate goods - such as parts used for cars. There was a 2.2 percent drop in the production of non-durable items such as food or cosmetics.

The energy sector was the only one to grow, showing a 3 percent increase after 1.2 percent growth in April.

Analysts said the sharp decline in May production could have been exacerbated by the timing of public holidays, adding that recent weakness in output is more pronounced than suggested by other indicators of economic health.

"We would need to see further PMI weakness before we become concerned about a stalling industrial (and wider) recovery," said van Vliet, referring to the monthly Purchasing Managers' Index surveys of private sector activity.

Industrial production in the euro zone's three biggest economies - Germany, France and Italy - fell month-on-month. Germany's 1.4 percent decline was the biggest since May 2013.

A 1.3 percent fall in French industrial production was the steepest since June 2013 and Italy's production registered its worst performance since November 2012 with a 1.2 percent drop.

Germany's faltering economy has cast further doubt over the euro zone's prospects for recovery this year, with no other big country strong enough to pick up the slack.

The 9.6 trillion euro economy of the euro zone began a steady climb out of a two-year recession last year, but any rebound is being hindered by continued austerity aimed at fixing public finances, joblessness and uneasy markets.

"It does appear that the euro zone manufacturing sector is facing a tough task to generate and sustain meaningful expansion," said Howard Archer, chief European economist at IHS.

Investors will look to the July ZEW survey of German economic sentiment on Tuesday to see how great the impact of the crisis in Ukraine has been on confidence in Germany, most of whose gas comes from Russia via Ukraine.

Euro zone industrial output is more than 12 percent below its pre-crisis peak and has a long way to go before the slack in the sector is fully eroded, analysts say.

Mario Draghi, head of the European Central Bank, will speak to lawmakers in the European Parliament later on Monday and may shed light on the bank's thinking after it cut interest rates and introduced measures to boost lending last month.

(Reporting by Martin Santa; Editing by Catherine Evans)

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