Euro-Region Industrial Production Unexpectedly Rebounds: Economy
Output in the 17-nation euro area rose 0.6 percent from April, when it fell 1.1 percent, the European Union’s statistics office in Luxembourg said today. Economists projected output to stagnate, the median of 29 estimates in a Bloomberg News survey showed. From a year earlier, production fell 2.8 percent after decreasing 2.4 percent in April.
Europe’s economy is slipping toward its second recession in three years as budget cuts across the region erode export and consumer demand. PSA Peugeot Citroen (UG), Europe’s second-largest carmaker, said today it will eliminate 14,000 jobs to stem widening losses. The European Central Bank last week cut borrowing costs to a record low after Spain and Cyprus joined Greece, Ireland and Portugal in asking for external aid.
“The bounce in euro-zone industrial production in May does little to change the view of a contraction in the overall economy in the second quarter,” said Martin Van Vliet, an economist at ING Bank in Amsterdam. “With the fiscal squeeze in the euro zone unlikely to ease soon and the debt crisis still unresolved, any recovery in euro-zone industrial activity later this year will likely be modest.”
German industrial output rose 1.5 percent in May from the previous month, when it slipped 2 percent, today’s report showed. Italy and Spain reported monthly gains of 0.8 percent and 0.9 percent, respectively. France had a 2.1 percent decline.
The euro fell, slumping below $1.22 for the first time since July 2010 to as low as $1.2170 at 1:32 p.m. in Frankfurt The single currency has decreased 6 percent against the dollar this year as governments struggled to stem the spreading crisis.
Euro-region finance ministers meeting in Brussels this week urged Spain to step up measures to narrow its budget gap, while giving the government an extra year to tackle overspending. Prime Minister Mariano Rajoy said on July 2 that the time has come to “press the accelerator pedal” as a recession undermines the impact of budget cuts.
Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., told Ken Prewitt and Tom Keene on “Bloomberg Surveillance” July 9 that it’s up to governments to toughen their response to the turmoil.
The ECB “cannot deal with the structural problems that the EU have,” he said. “The ECB is a firefighter. They can help put out fires for a while, but they cannot rebuild the house.”
The ECB on July 5 lowered its benchmark interest rate by 25 basis points to 0.75 percent, with President Mario Draghi saying that “there is no feeling that we are running short of policy options.” The central bank has injected more than 1 trillion euros ($1.2 trillion) into the banking system to bolster the economy and encourage lending.
“Economic growth in the euro area continues to remain weak, with heightened uncertainty weighing on confidence and sentiment,” the ECB said in its monthly report published today. “Some of the previously identified downside risks to the euro- area growth outlook have materialized.”
In Ireland, the economy contracted more than economists forecast in the first quarter, with gross domestic product dropping 1.1 percent from the previous three months, a report showed today. The economy returned to growth in the fourth quarter of 2011, expanding 0.7 percent.
Elsewhere, the Bank of Korea unexpectedly today lowered the benchmark seven-day repurchase rate by a quarter percentage point to 3 percent, the first cut since February 2009. In Australia, the number of people employed fell by 27,000 in June, the statistics bureau in Sydney said. Japan altered its stimulus program without adding extra money and Indonesia’s central bank kept interest rates unchanged for a fifth month.
The Federal Reserve signaled that a further economic slowdown would bring growing support among policy makers for additional steps to spur the three-year expansion. A few members of the Federal Open Committee said the Fed should ease policy to move the economy toward its targets of full employment and stable prices, according to minutes of the June 19-20 meeting released yesterday in Washington.
More Americans probably filed first-time claims for unemployment insurance payments in the week ended July 7, with economists in a Bloomberg survey forecasting an increase in applications for jobless benefits to 370,000.
With European demand faltering, governments plugging budget holes and at least seven member states in recession, companies are looking for ways to lower costs. Euro-area unemployment rose to 11.1 percent in May, a record.
While Germany’s expansion helped the euro area avert an economic slump in the first quarter, it has since shown increasing signs of weakness. German business confidence dropped to the lowest in more than two years in June, investors grew more pessimistic and industrial output dropped.
Siemens AG (SIE) Chief Financial Officer Joe Kaeser on June 26 indicated it will be more difficult to meet financial targets set for 2012 as demand tapers off and Chinese growth fails to pick up. It’s “going to be quite a rocky road to meet the targets for 2012,” he said in an interview on that day.
Peugeot will cut an additional 8,000 positions in the current reorganization, on top of 6,000 job reductions already announced last year. The company will also close its 39-year-old factory in Aulnay, France, and lower production at a plant in Rennes to slash operational costs.
The EU’s statistics office is scheduled to report euro- region exports for May on July 16.
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