French Factory Output, Italian GDP Drop During Crisis

French factory output dropped and Italy’s economy contracted as consumers, businesses and governments across Europe retrenched during the debt crisis.

French manufacturing production fell 0.7 percent in April from March, Paris-based statistics office Insee said today, adding to concerns Europe’s second-largest economy may struggle to revive growth as the crisis deepens. Italy’s economy, the region’s third largest, shrank 0.8 percent in the first quarter as household spending and exports declined, Rome-based statistics institute Istat said in its final report on gross domestic product.

The data underline the euro area’s faltering growth prospects more than two years into a sovereign debt crisis that over the weekend forced the region’s finance ministers to agree to provide as much as 100 billion euros ($126 billion) to prop up Spanish banks. While the European Central Bank kept its benchmark rate at 1 percent on June 6, President Mario Draghi said policy makers discussed cutting the rate to a new record low after downside economic risks increased.

“All the signs received so far point to a rapid deterioration in the economic outlook at the start of the second quarter,” said Tobias Blattner, an economist at Daiwa Capital Markets in Europe. “We expect the ECB to cut interest rates in July. Draghi has left the door wide open.”

Stocks Rally

Stocks rose, led by the biggest gain in Spain’s shares in six months, after the country sought a bailout for its banks and China’s exports beat estimates. The Stoxx Europe 600 Index (SXXP) gained 1.4 percent to 245.23 at 12:30 p.m. in Frankfurt. The euro strengthened to $1.2567.

“Even if the bailout of Spain’s banks is a short-term positive, an amplification of the recession in the periphery could remind investors that the recession risks are still significant,” said Thomas Costerg, an economist at Standard Chartered Plc in London.

The ECB last week forecast the 17-nation euro economy will contract 0.1 percent this year before returning to growth of 1 percent in 2013.

The drop in French factory output is the latest indication that the country is suffering from stagnant demand in its main export markets after the debt crisis pushed neighbors such as Italy and Spain into recessions.

“This paints a dire picture of the French economy that is clearly linked to a renewed intensification of the euro crisis,” said Joost Beaumont, an economist at ABN Amro in Amsterdam. President Francois Hollande, who won office last month on a pledge to revive growth “is between a rock and a hard place,” Beaumont said.

Italian Recession

Today’s report comes after the Bank of France said last week that sentiment among French factory executives slipped in May, suggesting the economy will shrink 0.1 percent in the second quarter.

The GDP drop “could be quite modest” because industrial production, which includes electricity generation, increased 1.5 percent in April, Beaumont said. The European Commission forecasts the French economy will grow 0.5 percent this year.

Italy entered its fourth recession since 2001 in the final quarter of last year and austerity measures being put in place by Prime Minister Mario Monti’s government suggest the downturn will continue, economists said.

Household Spending

Household spending decreased 1 percent from the fourth quarter and sales abroad fell 0.6 percent, today’s GDP breakdown showed. The Italian economy will contract around 1.5 percent this year, according to the Bank of Italy.

“The picture for the Italian economy looks extremely weak and the breakdown of the report shows a dramatic decline in domestic demand, a clear sign that the economy is suffering from both slower global demand and the effects of tighter fiscal conditions,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, wrote today in an e-mailed note. “Prospects don’t look rosier for the future, with both business and consumer confidence indicators pointing to another deep recession.”

In Asia, China’s exports rose in May at more than double the pace analysts estimated while industrial output and retail sales trailed forecasts, signaling that last week’s interest- rate cut was aimed at countering a domestic slowdown.

Overseas shipments climbed 15.3 percent from a year earlier, the customs bureau said yesterday, exceeding all 29 estimates in a Bloomberg News survey. Industrial output gained by less than 10 percent for a second month and retail sales increased the least in almost six years excluding holiday-month distortions, statistics bureau reports showed June 9.

China’s trade resilience signals Europe’s crisis has yet to spark a collapse in world commerce on the scale of 2008, even as Spain’s banking woes threaten to deepen the trauma. Stronger exports and imports also support the case for Premier Wen Jiabao to adopt a more restrained stimulus than the credit boom officials unleashed in 2008, which stoked a property bubble.

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net

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

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