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European output dives, hopes shift to U.S. shoppers

LONDON/BEIJING (Reuters) - Euro zone industrial output dived and the Bank of England said on Wednesday the British economy needs a lengthy period of healing, putting the onus on the U.S. consumer to help drive a global recovery.

Industrial production figures from China, supposedly a beacon of light during the world recession, also proved a disappointment but at least they showed growth. By contrast production in the 16 nations which use the euro fell no less than 20.2 percent in the year to March.

Reminders abounded that any recovery may not be as swift and strong as financial markets had hoped, with the Bank of England forecasting a slower UK pickup than it had previously expected.

“Now the economy requires a period of healing. That will take time,” Governor Mervyn King told a news conference to reveal the central bank’s quarterly economic forecasts.

These showed the bank believes the UK recession hit a low point this spring, with GDP suffering an annual fall of around 4.5 percent in the second quarter. Growth would resume early in 2010, reaching around 2.5 percent in two year’s time.

King underlined that any recovery was far from certain to last despite all the emergency treatment given to world economic and financial systems, noting that in Britain interest rates were near zero and authorities had thrown hundreds of billions of pounds into supporting the banking system’s malaise.

Financial markets across the world have climbed in recent weeks as investors sensed the “green shoots” of a recovery but King was cautious about Britain’s prospects, at least.

“There are pretty solid reasons for supposing that there will be a recovery next year, but also pretty solid reasons for questioning if that will be sustained,” he said. “It would be extremely unwise for anyone to claim that they know what the future is to hold.”

Such caution shifted hopes for signs of revival to consumers, who account for a large chunk of economic activity.

Markets expect a U.S. retail sales report at 1230 GMT to add to evidence that the crisis that battered financial markets, destroyed millions of jobs and pushed the world economy into recession, may be abating.

Chinese shoppers seem to be pulling their weight. Retail sales grew 14.8 percent year-on-year in April, slightly up from 14.7 percent in March.

However, other data on Wednesday showed China’s factory output growth slowed last month, providing fresh evidence a day after poor export data that recovery in the world’s third-largest economy is not yet on a rock-solid footing.

NO STRAIGHT LINE

“It is important not to attach too much importance to one particular data point and to recognise that any recovery in China is not going to proceed in a straight line,” said Brian Jackson, an economist with Royal Bank of Canada in Hong Kong.

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Hopes will now be pinned on shoppers in the United States. Retail sales excluding the troubled auto sectors are seen edging up 0.2 percent in April after a 0.9 percent fall in March.

Intel Corp Chief Executive Paul Otellini was the latest company official to voice guarded optimism, saying the second quarter has been so far slightly better than expected for the technology bellwether.

However, there were still plenty of warning signs that the road to full recovery would be long and bumpy.

German car-parts group Schaeffler announced that it may have to cut roughly 4,500 jobs as the global slump eats into sales. Schaeffler showed how long some big companies may need to recover, forecasting that its markets would take up to five years to return to 2008 levels.

Overall Europe produced mixed earnings reports, including a bigger then expected loss by Dutch financial group ING.

Governments kept up the drive to cure the banks’ problems. Germany’s cabinet approved a “bad bank” plan to relieve lenders of toxic assets, aiming to boost confidence in the banking sector where the economic crisis first surfaced last year.

Finance Minister Peer Steinbrueck said the plan would target assets worth just under 200 billion euros.

Despite the caution, the underlying sense of optimism about the world economy was evident in market action.

The U.S. dollar fell, its safe haven appeal eroded by the optimism mixed with concerns about the United States’ fiscal health. World stocks as measured by MSCI were little changed after two consecutive days of moderate losses.

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