Plunging Economic Output

Seasonally adjusted industrial production fell month on month by 1.9 per cent in the 15-member euro zone and by 1.4 per cent in the 27-member European Union, the EU statistic office, Eurostat said on Monday, July 14.

It was the biggest fall in industrial production since December 1992. The slide comes against a backdrop of soaring inflation, surging oil prices and the fallout from a weakening global economy and credit crisis.

Adding to the pressure on the 15 countries sharing the euro has been the strength of the common currency, which last week edged back up towards it all-time high of just over $1.60.

Despite being considered by economists as a key if volatile economic indicator, the industrial production contraction will also add to expectations that growth in the European economy will slip back a gear in the run-up to the end of the year.

The monthly fall in industrial production translated into an annual 0.6 per cent in the euro zone dragged down by the slumping output in the currency bloc's three biggest economies Germany, France and Italy. Data released showed exports from Germany and France, which together account for almost half the euro zone’s output falling in May.

Industrial output down Europe-wide

The increasingly gloomy economic picture emerging in Europe also came amid signs that the US mortgage market crisis still poses risks for the world economic outlook with Washington throwing two key lenders financial lifelines over the weekend.

"The crisis is by no means over," banking expert Dirk Schiereck told the DPA news agency. "It will continue through the second half of the year," the European Business School professor said.

Year-on-year industrial output in the broader-based EU fell by 0.5 per cent, Eurostat said, with 18 of the 27 member states clocking up a drop in industrial production. The fall in EU industrial production also followed evidence that Central and Eastern Europe's once booming economies are losing momentum.

Inflation affects consumer demand

Economists had also expected a grim set of industrial production data, predicting a 2.3 per cent month-on-month fall but a modest year-on-year gain of 0.3 per cent.

Helping to lead the fall in euro zone industrial production was a sharp 3.3-per-cent month on month drop in durable consumer goods in May. This represented a 5.2 per cent annual fall and points to worries that rising inflation and growing economic uncertainty is taking its toll on consumer demand just as slowing global growth and a strong currency are undercutting exports. In April, production grew by 1.0 per cent in the euro zone and 0.3 per cent in the EU.

The slump in euro zone industrial production could make it more difficult for the European Central Bank to raise interest rates again in the coming months. The ECB delivered a 25-basis points increase in the cost of money this month to ward off renewed inflationary pressures in the euro zone.

At four percent, euro zone inflation now stands at double the ECB's target of "close to, but just below 2 per cent" with soaring food and energy costs having sparked a global pickup in inflation.