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European Industrial Production Rebounds

European industrial production rebounded in July led by surging German output after the biggest drop in more than a year in the previous month.

Production in the 17-nation euro area advanced 1 percent from June, when it fell 0.8 percent, the European Union’s statistics office in Luxembourg said today. That’s the biggest gain since November 2010. Economists forecast a gain of 1.5 percent, the median of 28 estimates in a Bloomberg News survey showed. In the year, output advanced 4.2 percent.

European manufacturers have helped bolster the region’s expansion as a worsening debt crisis forced governments to cut spending, eroding consumer confidence. Bayerische Motoren Werke AG (BMW) Chief Financial Officer Friedrich Eichiner said on Sept. 8 that the German luxury carmaker’s factories are “working at full tilt” partly on stronger demand in markets such as China.

“We’ll see increasing signs of economic weakness,” said Gerd Hassel, an economist at BHF Bank AG in Frankfurt. “The euro-region economy will probably fail to expand in the third and fourth quarters while growth rates in emerging markets have weakened but will remain relatively solid.”

The euro was little lower against the dollar, trading at $1.3650 at 10:04 a.m. in London, down 0.2 percent on the day.

In Germany, Europe’s largest economy, which has powered the region’s economic expansion, industrial output surged 4.1 percent from June, when it fell 0.8 percent, today’s report showed. French production advanced 1.6 percent, while Italy showed a 0.7 percent drop. In Spain, output also decreased.

‘Downside Risks’

Euro-region growth may weaken to 1.3 percent in 2012 from 1.6 percent this year, the European Central Bank said on Sept. 8. It had previously forecast the economy to expand 1.9 percent and 1.7 percent this year and next, respectively.

A drop in government spending and slowing exports were among the reasons why economic growth eased to 0.2 percent in the second quarter from 0.8 percent in the previous three months. ECB President Jean-Claude Trichet, who will retire at the end of October, said on Sept. 8 that he expects the euro- area economy to expand “moderately, subject to particularly high uncertainty and intensified downside risks.”

Group of Seven finance chiefs vowed on Sept. 9 to support banks and buoy growth as Europe’s debt crisis roiled financial markets and threatened a global slump. The Greek Cabinet earlier this month approved additional measures to meet the country’s deficit targets this year and next to prevent a default and help restore investor confidence.

Recession Risk

With governments from Spain to Ireland cutting spending to plug their budget holes, manufacturers have relied on faster- growing markets to bolster sales. BMW, Daimler AG (DAI)’s Mercedes- Benz and Volkswagen AG (VOW)’s Audi are forecasting record sales this year on increasing demand in China and the U.S. Audi said last month that it is hiring staff to boost car production.

Euro-region output of capital goods jumped 3 percent from June, when it fell 1.5 percent, today’s report showed. Energy production slipped 0.8 percent and output of intermediate goods rose 0.8 percent. Production of durable consumer goods advanced 2.9 percent, according to the statistics office.

BHF Bank’s Hassel said the euro-region economy may expand at less than half the pace the ECB projected for 2012, or 0.5 percent, forcing the central bank to keep borrowing costs at 1.5 percent after two increases in the benchmark this year.

“It’s not enough reason for the ECB to lower interest rates but increases won’t play a role either,” he said. “There’s still a 50 to 50 chance of a renewed recession.

To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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