Euro zone factory output falls again, recovery far off

Wed Dec 12, 2012 6:20am EST
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By Robin Emmott

BRUSSELS (Reuters) - Euro zone factory output continued its steep fall in autumn this year, underscoring the feeble domestic demand that risks prolonging the bloc's recession.

Industrial production in the 17 countries sharing the euro fell 1.4 percent in October after falling sharply percent in September, the EU's statistics office Eurostat said on Wednesday. That was much worse than the modest growth expected by economists in a Reuters poll.

Factories had proved surprisingly resilient over the European summer, posting two months of moderate gains, but the new data supports forecasts of a third quarterly contraction in the euro zone's economy in the October-to-December period.

After three years of a debt crisis that has driven unemployment to a record level and pushed governments to slash spending, the economy is caught in a spiral: households are not spending and so companies are not selling, forcing them to cut staff which then further weakens consumption.

"Domestic demand will only turn around when uncertainty among the companies about the fate of the euro has been dispelled, prompting them to increase investment again," Ralph Solveen, an economist at Commerzbank, wrote in a research note.

Policymakers in the euro zone, which generates a fifth of global output, are divided over the chances of an economic recovery next year but the European Central Bank has downgraded its forecasts for 2013 and expects any rebound to come in the second half of next year.

The bloc's 9 trillion euro economy is likely to contract at least 0.4 percent this year, marking its second recession since 2009 and contrasting with the United States and much of Asia and Latin America, where growth is gradually returning.

The ECB held off from another cut in the cost of borrowing at its Governing Council meeting last week, but could take its interest rate to below the current 0.75 percent level in 2013, as inflation falls towards its target.   Continued...

A worker controls a tapping of a blast furnace at Europe's largest steel factory of Germany's industrial conglomerate ThyssenKrupp AG in the western German city of Duisburg December 6, 2012. REUTERS/Ina Fassbender