EU Factory Activity Steadies After September Nosedive

Reuters

Industrial production in the euro zone steadied in October after nosediving in September, supporting forecasts that an oncoming recession will likely be mild, although the improvement may prove temporary.

Output at factories across the 17-country single currency area fell 0.1 percent in October from September, European Union statistics agency Eurostat said, slightly below the expectations of economists polled by Reuters, who saw industrial output unchanged from the previous month.

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"The euro zone economy is slowly but surely slipping into a new recession," said Martin van Vliet, an economist at ING.

Euro zone GDP grew just 0.2 percent in the third quarter and most economists expect it to contract in the fourth and also in the first three months of next year, sending the bloc back into recession after its two-year recovery from the worst global financial crisis since the 1930s.

The euro zone's own crisis with government debt has scared off investment and eaten into business confidence, particularly since August when investors intensified their scrutiny of the bloc's problems, dumping banking stocks and pushing up borrowing costs for Italy and Spain to potentially unsustainable levels.

Fears that a euro-zone break up or a series of defaults could unleash the kind of financial chaos that followed the collapse of U.S. investment bank Lehman Brothers in 2008 are also sickening the economy.

Europe's factories are feeling the worst of that stress, while government spending cuts and job losses are depriving companies of demand for goods and crushing exports.

The European Central Bank cut its main interest rate back to a record low of 1 percent on Dec. 8 to try to boost the economy, and economists expect further cuts early next year. But an EU leaders' summit last week failed to reassure investors that the euro zone is any closer to resolving the debt debacle.

That will continue to weigh on industry, said Marco Valli, an economist at UniCredit. "We shouldn't expect any meaningful recovery in industry in the coming months," he said, predicting a 0.2 percent fall in overall euro zone GDP in the October-to-December period.

NOT SO BAD?

Still, the euro zone's monthly contraction looked favourable compared to the 2-percent slide in output in September, the biggest fall since February 2009, when the economy was weakened by the global financial crisis.

Germany, the bloc's biggest economy, surprised by posting a 0.8 percent increase in factory output, after tumbling 2.9 percent in the previous month.

That could provide some support for economists and policymakers who say the euro zone's economy - which generates about 16 percent of global gross domestic product - is slowing down, but not heading for a plunge. Indeed, one survey showed German analyst and investor sentiment rose unexpectedly this month, ending a run of nine monthly declines.

France, the euro zone's other leading economy, saw its industrial output unchanged after a 2.2-percent fall in September.

Ireland reported a 6.6 percent monthly rise. "For now at least, Ireland appears to be weathering the, slowdown rather better than its neighbours," said Ben May at Capital Economics.

But Italy and Spain, where unemployment is the highest in the euro zone at 20 percent of the working population, registered falls of 0.9 percent and 1.1 percent in industrial production in October, respectively. Output fell 0.7 percent in the Netherlands.

The negative trend was also clear in Eurostat's reading of industrial production on an annual basis.

Output rose 1.3 percent in the area in October, compared to a 2.2 percent increase in September, and notched up its fourth consecutive month of falls.