Output falling, eurozone heads for new recession

The strong data seen in January has unexpectedly faded and surveys point to a deeper downturn, with the drag coming from a debt-laden South. (Photo: Reuters)

May 14, 2012, Monday/ 14:59:00

Output at factories in the euro zone unexpectedly fell in March, the latest in a series of disappointing numbers signalling that the bloc's recession may not be as mild as policymakers hope.

Industrial production in the 17 countries sharing the euro fell 0.3 percent in March from February, the EU's statistics office Eurostat said on Monday. Economists polled by Reuters had expected a 0.4 percent increase in the month.

The figures stood in contrast with German data last week showing output in the euro zone's largest economy up 2.8 percent for the month, underlying the division in the bloc. Many economists expect Eurostat to show on Tuesday that the euro zone entered its second recession in just three years at the end of March, with households suffering the effects of austerity programmes aimed at cutting debt and deficits. "Industrial production is a timely reminder that first-quarter GDP will likely show a contraction," said Martin van Vliet, an economist at ING. "With the fiscal squeeze unlikely to ease soon and the debt crisis flaring up again, any upturn in industrial activity later this year will likely be modest." European officials have repeatedly said the slump will be mild, with a recovery in the second half of this year. But the strong economic data seen in January has unexpectedly faded and business surveys point to a deeper downturn, with the drag coming from a debt-laden south, epitomized by Greece, Spain and Italy. Economists polled by Reuters last week estimated the euro zone economy shrank 0.2 percent in the first quarter, after shrinking 0.3 percent in the fourth quarter of last year.

"We suspect that a further slowdown in the service sector meant that the wider economy contracted by around 0.2 percent last quarter," said Ben May, an economist at Capital Economics in London. "What's more, April's disappointing survey data for both the industrial and service sectors suggest that the recession may continue beyond the first quarter." EU leaders will meet in Brussels on May 23 to try to map out ways the euro zone and the wider European Union can return to growth while still cutting debts and deficits, but economists and investors say there is little room to maneuver. "In addition to 'high alert and forceful' crisis management, Europe still needs to articulate more clearly its longer-term game plan," Erik Nielsen, Unicredit's global chief economist, wrote in a note to clients on Sunday. In terms of the March output data, economists said the performance underlines the weak demand for goods such as machinery and consumer products, as the currency area suffers from the impact of a two-year debt crisis that has driven unemployment to a record high. On an annual basis, factory output sank 2.2 percent in March, the fourth consecutive monthly slide, Eurostat said, and only Germany, Slovenia and Slovakia were able to post growth. The picture was similar on a monthly basis, with foreign demand for German cars and high quality machinery driving production. But elsewhere, output fell 9 percent in the Netherlands, the biggest drop in the euro zone for the month.

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