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WRAPUP 1-Germany and Italy lead euro zone production slump

Published 04/09/2009, 09:21 AM
Updated 04/09/2009, 09:24 AM
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* German, Italian output down by over a fifth on the year

* Netherlands, Finland, Greece also see production fall

* ECB's Trichet takes aim at governments

By Paul Carrel

BERLIN, April 9 (Reuters) - Germany and Italy suffered record falls in industrial output in February, leading a slump across the euro zone where manufacturers are bearing the brunt of a sharp downturn in global trade.

From Greece to Finland, production fell in countries across the 16-member euro area and showed little sign of picking up any time soon, dealing a blow to recovery hopes.

In Germany, Europe's biggest economy, industrial production fell by 23.2 percent on the year -- the biggest annual drop since reunification in 1990, official figures showed on Thursday.

Italy's output fell by 20.7 percent -- its steepest drop since the series began in 1990.

Colin Ellis, European economist at Daiwa Securities in London, described the German and Italian figures as "dreadful".

"Faced with that pace of destruction, the authorities need to do more to stimulate demand and provide some relief to those businesses that are the backbone of the German and Italian economies," he wrote in a research note.

European Central Bank (ECB) President Jean-Claude Trichet bolstered analysts' expectations that the ECB will cut its headline interest rate from the current record low of 1.25 percent to 1 percent in May and then stay on hold at that level.

"As regards the main refinancing operation rate... I did not exclude that we could -- in a very measured way -- go down from the present level," he told Italian newspaper Il Sole 24 Ore.

"We are experiencing a market correction that is very large. It is a process that is still under way," he said.

Trichet was critical of governments' performance, telling the business daily: "They have not been quick enough to be entirely convincing in the eyes of economic agents."

Ellis at Daiwa Securities agreed: "Unfortunately, any further measures increasingly look set to be too late in coming, or too ineffective in application, to provide much support."

QUICK FIX?

In Germany, the government agreed on Wednesday to put more cash into a car junking subsidy that has boosted auto sales.

"In March there should at least have been a clear rise in car production thanks to the car scrapping subsidy," said Goldman Sachs economist Dirk Schumacher.

However, some economists say the subsidy will mainly benefit foreign makers of small cars and act as a drag on future sales.

Despite the boost to carmakers, total output is down sharply in Germany. In February, industrial production fell 2.9 percent on the month and the Economy Ministry said a recent slump in orders pointed to further weakness in output in coming months.

"The latest data clearly suggest that the recession is still in full swing and our relatively downbeat forecast of a 4 percent fall in German GDP this year is starting to look too optimistic," said Jennifer McKeown at Capital Economics.

Since World War Two, Germany's economy has never contracted by more than one percent in a single year.

The economy is facing a collapse in foreign demand -- with exports down by over 23 percent on the year in February.

The Italian government is also trying to support vehicle production with financial incentives for car-buyers but analysts said it was too early to assess the impact of the measure.

A 3.5-percent month-on-month fall in industrial output in February dashed hopes that a deep manufacturing recession may be bottoming out in Italy.

"The feeling was that the fourth quarter of 2008 would prove to be the low point, but looking at this data we don't expect Q1 to show any improvement," said Marco Valli at Unicredit MIB.

Italy has been in recession since spring last year.

In the Netherlands, manufacturing production fell 2.2 percent in February. Statistics Netherlands economist Michiel Vergeer said the January-February period showed a deceleration in the decline in production.

"You can't say it is stabilising, that is not correct, but the pace of the decline is lower," he said.

In Greece, the pace of the decline in industrial output also slowed, registering a 4.6-percent year-on-year drop in February after a decline of 10.2 percent in January.

In Finland, production fell 22.2 percent on the year in February. The story was similar in neighbouring Sweden, a non-euro zone state, where output fell 22.9 percent.

"It is a little early to say that ... there is reason to expect industrial production to bounce back soon," said Michael Grahn, an analyst at Danske Markets. "It is more likely that inventories need to be drawn down further."

(Additional reporting by Gavin Jones in Rome, Aaron Gray-Block in Amsterdam, Harry Papachristou in Athens and by Mia Shanley in Stockholm; Editing by Jason Neely)

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