Euro zone output jumps more than expected in July

MILAN (Reuters) - Euro zone industrial output jumped twice as much as expected in July, breaking a two month trend of contraction and raising hopes that the single currency area may start growing again in the third quarter after stalling in the previous three months.

Smog surrounds The Shard, western Europe's tallest building, and St Paul's Cathedral in London April 3, 2014. REUTERS/Suzanne Plunkett

Industrial production in the 18 countries sharing the euro jumped by 1.0 percent month-on-month in July, and was 2.2 percent higher on the year, well above expectations of economists polled by Reuters.

The annual expansion showed the strongest rise since November last year when production increased 2.7 percent, European Union’s statistics office Eurostat said.

“However, all is not well for the industrial sector,” said Martin van Vliet, senior euro zone economist at ING.

“Production remains more than 10 percent below its pre-crisis peak and the recent weakening in the industrial surveys shows that manufacturers are finding life more challenging, which is not surprising given the tensions and sanctions between Russia and the West over the crisis in Ukraine and the slowdown in demand from some EM economies,” he added.

Eurostat said the monthly rise was driven mainly by the production of capital goods which rose 2.6 percent in July, followed by 1.2 percent growth in the production of non-durable consumer goods.

Europe’s growth engine Germany saw industrial production expanding at its fastest pace in eight months, up 1.9 percent month-on-month, matching a rise seen in November last year.

Italy was the only major euro zone country that saw its output fall as production contracted 1.0 percent on the month.

The euro zone’s second largest economy France reported a deceleration in industrial output growth to 0.2 percent on the month from a 1.3 percent rise in June.

Analysts said the Italian data was worrying because it could signal that the country would remain in recession in the third quarter as well.

“It’s disappointing and judging from the sentiment indicators we have had for August it means in all likelihood industrial output will fall in the third quarter, which means GDP risks contracting again as well,” said Riccardo Barbieri, chief European economist at Mizuho.

Both Rome and Paris struggle to fix their public finances. France said on Wednesday it would not honour commitments to bring its budget deficit below the European Union ceiling of 3 percent of GDP next year as promised.

In a separate data release, Eurostat said that employment in the euro zone rose 0.2 percent on the quarter in the three months to June after growing 0.1 percent in the previous two quarters.

Reporting by Martin Santa, Additional reporting by Gavin Jones