August 13, 2014 / 9:11 AM / 4 years ago

UPDATE 2-Unexpected drop in euro zone output clouds recovery hopes

* June industrial production undershoots expectations
    * Falls mth/mth, flat yr/yr as recovery struggles
    * Three biggest economies rise month-on-month
    * German output drops year-on-year

 (Adds analyst, graphics, more details)
    By Martin Santa
    BRUSSELS, Aug 13 (Reuters) - Euro zone industrial production
contracted unexpectedly in June, hurting hopes for a stronger
recovery as the region feels the effect of conflict in Ukraine,
Iraq and and Gaza.
   Factory output fell 0.3 percent on the month in June after a
1.1 percent drop in May, data showed on Wednesday, compared with
market expectations of a 0.3 percent rise.
    Production was flat compared with a year ago, after rising
an upwardly revised 0.6 percent rise in May. Economists polled
by Reuters had forecast a 0.1 percent annual increase in June.
The annual reading was the lowest since August 2013.
    "This is a very disappointing figure after the already
strong contraction in May," said Peter Vanden Houte, chief euro
zone economist at ING.
    The monthly drop was caused mainly by a 1.9 percent drop in
production of non-durable consumer goods, down for a second
consecutive month, and a 0.7 percent decline in energy
production, which was up in the previous three months.
    A recovery by the 9.6 trillion-euro economy is struggling to
gain momentum a year after exiting a recession. High
unemployment, sluggish reforms and the fallout from conflict in
Ukraine, Gaza and Iraq are holding it back.
    The latest sign of just how fragile the euro zone's economic
rebound remains came from Germany on Tuesday, where investor
sentiment dove to its lowest since December 2012 on concern
about the impact European sanctions against Russia will have.
    Eurostat will publish a flash estimate of second-quarter
economic growth on Thursday. Economists had expected expansion
of 0.2 percent on the quarter in the three months to June, the
same pace as seen in the first quarter.
    "A growth figure of 0.2 percent now seems to be out of
reach," Vanden Houte said. "With the geopolitical tensions not
cooling down for the time being, there is little likelihood that
the growth pace will accelerate in the second half of the year."
    While the bloc's three largest economies saw production
rising on the month in June, Germany's industrial output fell
0.4 percent year-on-year in June in the country's first annual
drop since July 2013.
    The region's second-largest economy, France, saw flat output
on the year in June, its best performance since December.
Italy's industrial production rose by 0.4 percent in June after
a 1.7 percent decline in May. But much stronger expansion is
needed to create jobs and rejuvenate struggling economies.
    Poor economic health will get the attention of the European
Central Bank. It is already expected to keep interest rates near
their record lows for an extended period, to nurse the economy
along, but large-scale quantitative easing is not looked for
    "Big decisions on more unconventional policy measures will
have to await 2015," added Vanden Houte.

 (Additional reporting by Monica Ulmanu in London, Editing by
Louise Ireland, Larry King)
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