European industry slumps, raises rate cut pressure

By Sumeet Desai

LONDON (Reuters) - Factory output all over Europe collapsed in November, presaging a rapid shrinking of the continent's largest economies and raising pressure on central banks to cut interest rates further to stop the rot.

Catastrophic! Disastrous! Horrendous! Analysts on Friday were at a loss for words adequate to describe the scale of the meltdown in European industry as a global credit crunch squeezes the life out of companies all the way from Spain to Sweden.

In Germany, Europe's largest economy and a manufacturing powerhouse, industrial output slumped 10 percent on the year, its fastest pace of decline since 1993. In France, it fell a record 9 percent. And in Spain, by 15.1 percent.

Caught completely offguard by the severity of the downturn, the European Central Bank, which raised interest rates only last July, is expected to chop another half percentage point off its main lending rate to a record low of 2 percent next week.

"Further out, we believe the ECB will eventually bring interest rates as low as 1.0 percent in the first half of 2009 as the euro zone suffers sharp recession," said Howard Archer, chief European economist at consultancy Global Insight.

The Bank of England, which also only started fighting the coming recession in earnest in October, cut rates to a record low of 1.5 percent this week, and will likely cut again next month.

British factory output dived 7.4 percent on the year, the biggest drop since 1981 when Britain was in the middle of an industrial meltdown that decimated its car firms and coal mines.

In Sweden, industrial output fell 11.9 percent annually in November and its central bank looks sure to slash rates further.