Euro zone Jan industry output up more than expected

Bund and Euribor futures fell to session lows after the data dampened expectations for interest rate cuts by the European Central Bank, even if economists said the euro zone would not defy a slowing US economy and a strong euro forever. “This could strengthen a little bit the ECB hawks who say overall growth is only modestly below trend,” said Holger Schmieding, head of European economics at Bank of America. “I don’t think it will last. Eventually the weakening situation in the US and the currency will hit home. But so far so good,” he said. Production in the 15 countries using the euro increased 0.9% month-on-month for an annual gain of 3.8%, Eurostat said.

Economists had expected a 0.3% monthly rise and a 2.6% annual gain. “Euro zone industrial output is still maintaining a reasonably positive trend for now, but it is flying in the face of economic reality,” said David Brown, chief European economist at Bear Stearns. “The weakening euro zone fundamentals should pull output growth back down to earth in the coming months,” Brown said.

Eurostat revised up its December output data to show the indicator flat month-on-month, compared with a previous reading of minus 0.2%, and an annual rise of 1.7% compared with the previously reported 1.3% gain. The data improves prospects for Q4 economic growth and is likely to strengthen the case for the ECB to resist pressure for an early interest rate cut. Production of capital goods rose the most in January, 2.7% month-on-month and 7.5% year-on-year. Energy fell 2.9% in monthly terms but increased 5.0% year-on-year.

The European Commission has cut its 2008 growth forecast for the euro zone to 1.8% from 2.2% as a result of the global credit crunch, slower growth in the United States, high oil prices and a strong euro. With euro zone inflation stuck at a record high of 3.2% year-on-year in February, the ECB has signaled it is not yet ready to cut rates.

Eurostat said Italian output jumped 1.3% month-on-month, the strongest rise since December 2006, after a weak Q4 of 2007. Output in France rose 0.5%, consolidating a 0.6% increase in December. In Germany, the euro zone’s biggest economy, production increased 1.3% month-on-month. The strong output data came despite an export-denting surge in the euro, which was trading at nearly $1.54 after gaining more than 5% against the US currency since the start of the year. (Reuters)