Euro zone industry output in surprise fall due to Germany, Italy

By Francesco Guarascio

BRUSSELS (Reuters) - Production at factories in the euro zone dropped in July for a second consecutive month and by more than expected, in what could herald a possible slowdown of the bloc's economy in the third quarter, official data released on Wednesday showed.

The fall was mostly caused by bad data from Germany, the bloc's largest economy, and Italy, which has gone through a stormy summer with market jitters over large spending plans of its new eurosceptic government.

The European Union statistics agency Eurostat said industry output in the 19-country currency bloc fell in July by 0.8 percent during the month and by 0.1 percent year-on-year.

The numbers are a negative surprise after economists polled by Reuters had forecast a smaller 0.5 percent drop month-on-month and a 1.0 percent rise from a year earlier.

Eurostat also revised its figures for June, saying industrial production fell 0.8 percent on the month, a bigger fall than the previous estimate of 0.7 percent.

The year-on-year data for June was also revised down to a 2.3 percent rise from 2.5 percent.

Both Germany and Italy, the third biggest economy in the bloc, recorded a 1.8 percent monthly drop in their July industrial production, which was only partly offset by a 0.7 percent increase in the output of France, the bloc's second largest country.

"This should prove to be more food for thought for Italian political actors currently negotiating the content of the next budget," ING analyst Paolo Pizzoli said in a note.

Market tensions over Italy have eased in the last 10 days after the government said it was committed to reducing its large debt and keeping the deficit under control in its budget for next year, which will be finalised by mid-October.

IMPACT ON GROWTH?

Although output data tend to be very volatile, industry's marked slowdown in the first month of the third quarter could be a sign of weaker economic growth.

Eurostat will release its preliminary flash estimate of euro zone's growth in the third quarter on Oct. 30.

The data were disappointing, said Jack Allen at research firm Capital Economics. But he added that things were not as bad as the figures showed, because the drop followed an unusually strong growth in production in the second quarter.

The monthly output fall in July was mostly caused by a 1.9 percent drop in the production of durable consumer goods, such as cars or fridges, which could show managers' prediction of lower consumer appetite for larger spending.

The output of non-durable consumer goods, such as clothing, also fell more than the overall reading, by 1.3 percent on the month.

However, in a positive sign for future investment, the output of capital goods, such as machinery, went up by 0.7 percent on the month.

(Reporting by Francesco Guarascio; editing by Philip Blenkinsop and Jon Boyle)