July 9, 2010 / 10:04 AM / 10 years ago

Output data points to stronger euro zone recovery

ROME (Reuters) - Strong industrial output figures in the euro zone’s three main economies in May point to a consolidating economic pick-up and firm second quarter growth, though analysts warned the recovery may slow in the second half.

In Italy, the euro zone’s third largest economy, output rose 1.0 percent from the month before, data showed on Friday, the fifth consecutive gain and easily beating forecasts of a 0.5 percent increase.

That followed even more impressive data from France, where output jumped 1.7 percent, helped by hot weather boosting demand for electricity, and from the euro zone’s industrial powerhouse Germany, which on Thursday reported a surge of 2.6 percent.

The figures easily beat expectations in all three countries, which together make up more than two thirds of euro zone output, and point to a strong number when aggregate data for the area is published on Wednesday.

“We will probably see a euro zone rise of between 1 and 1.5 percent, which points to a very strong second quarter both for industrial output and gross domestic product,” said Unicredit analyst Marco Valli.

However, Valli warned that the current rate of activity was being buoyed by firms rapidly re-building their depleted inventories and by a strong rebound in construction, two factors which can be expected to diminish.

Thorsten Polleit of Barclays Capital Research was equally cautious.

“There are a few indicators which suggest that a cyclical recovery is underway but whether that points to a self-sustaining recovery is another thing,” he said.

“Economies are still being strongly influenced by the extraordinary fiscal and monetary policies which are in place at the moment and so I think it would be too early to proclaim a real recovery.”

Both analysts forecast a second quarter euro zone GDP rise of around 0.6 percent, following the 0.2 percent gain between January and March, but Valli said that would slow to rates of between 0.2 and 0.3 percent over the second half of the year.

SPENDING CUTS TO CURB GROWTH?

Governments across Europe are embarking on harsh programmes of fiscal retrenchment to rein in debts that ballooned during the world financial crisis — a process that many analysts say will inevitably hinder growth, although European Central Bank President Jean-Claude Trichet disagrees.

He dismissed warnings that drastic and simultaneous spending cuts planned by euro zone governments could send the 16-country bloc back into recession.

“We (ECB) are totally against the view that reducing public expenditures will hinder economic growth,” Trichet said on Friday at an ECB watchers conference organised by the Goethe University Frankfurt’s Centre for Financial Studies.

“Consolidation measures will help turn the current upturn into sustained growth.”

U.S. policymakers have called for continued stimulus to keep momentum in the global recovery.

While France’s output in May was strongly influenced by a surge in the energy sector as the warm weather increased demand for air conditioners, in Italy the production increase was broad-based.

Output of consumer goods rose jumped 1.9 percent, the largest rise since August last year, while investment goods were up a healthy 1.5 percent.

On a work-day adjusted year-on-year basis, output was up 7.3 percent, broadly in line with a 7.5 percent annual rise in April.

In France, output in the three months to May was up 8.0 percent compared with same period of 2009.

Additional reporting by Daniel Flynn and James Mackenzie, editing by Mike Peacock

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