Industrial output from France and Italy pointed to a bumpy road ahead for the eurozone's still fragile economic recovery on Tuesday, even if government spending will maintain the momentum into the end of this year. Analysts said sharp falls in output in Italy and France - a day after Germany's had surged - looked largely due to seasonal volatility.
But firm growth envisaged for the third and fourth quarters in the 16-nation bloc still looks far from sustainable. French output fell 1.5 percent in September compared with expectations of a 0.5 percent rise, while output in Italy plunged 5.3 percent, worse than expected and almost fully reversing a surprise 5.8 percent jump the month before.
The data ran against a 2.7 percent surge in production reported by larger neighbour Germany, and the mixed picture was completed on Tuesday by a larger than expected drop in a closely watched indicator of German investor morale. The euro fell against the dollar after the ZEW index fell to 51.1 in November from 56.0, its lowest level for four months and below expectations of a 55.0 reading.
Germany, France and Italy make up around two thirds of eurozone economic activity. However, analysts remained upbeat about the latest data, pointing out that output had risen significantly in all three countries in the third quarter as a whole and seeing no sign of any imminent stutter in the recovery.
"If you take a step back from the volatility of industrial output over the summer, the underlying story is one of clear economic improvement in the third quarter which is also continuing into the fourth," said Deutsche Bank's Gilles Moec. "If you look at sentiment indicators I think we are still seeing a strengthening of the recovery in the autumn, not any loss of momentum."
Even the ZEW drop was shrugged off by most analysts, who underlined that the current conditions sub-index was continuing to improve and the overall indicator remained well above its long-term average. The world's biggest economies - the European Union, the United States and Japan - are either expected to or already have emerged from recession in the third quarter.
But a Group of 20 meeting - and the IMF - on Saturday stressed that the recovery was largely based on fiscal and monetary stimulus and pledged to keep the aid flowing until recovery was assured. "The recovery is clearly ongoing and will continue into the fourth quarter as well," said Simon Junker of Commerzbank. "If anything growth will slow, but we do not expect a relapse."
A Reuters survey of 39 analysts pointed to euro zone economic growth of 0.5 percent in third quarter when data is released on Friday, taking the bloc out of recession after five consecutive quarters of contraction. Luigi Speranza of BNP Paribas, who forecasts a marginally stronger reading of 0.6 percent, said the pace will be broadly maintained by a 0.5 percent rise in the last three months. However, like Moec, he warned of a downturn next year. "I think we will either see marked volatility in growth in 2010, linked to the phasing out of government incentives, or a stabilisation at a lower level than we are seeing now," he said.