Eurozone Industry Shows Disappointing Recovery Raising Further Fears Over Growth

The eurozone's industrial production rose by 0.6% in September, failing to meet analysts' expectations and raising further concerns over economic growth.

Experts had forecast a 0.7% monthly increase in production, but are now suggesting that industry will knock up to 0.1% off quarterly GDP growth.

"September's eurozone industrial production figures confirm that industry acted as a drag on the currency union's economy in Q3 and suggest downside risks to Friday's eurozone GDP figures. The 0.6% monthly rise in production was in line with the data for the major countries already released but reversed less than half of the (slightly revised) 1.4% drop in August and left production down by 0.5% in Q3 overall," wrote Jonathan Loynes of Capital Economics in a note.

The largest economies in the eurozone - France, Germany and Italy - have all experienced disappointing years and the region is now on the brink of recession.

The poor figures highlight a cross-sectional weakness in the eurozone's industry. Consumer goods production fell again and the only real bright spark was the 2.9% increase in the production of capital goods. Looking forward, a weak euro may allow for exports to grow over the coming months, but analysts are expecting weak GDP growth figures later this week.

On a national basis, German production rebounded – as expected – after August's sharp drop, France stood still, while Italian and Dutch production fell. The only country not to experience contraction on an annual basis was Spain.

All eyes will now be on the European Central Bank (ECB), which last month announced that it would embark on a covered bond purchasing programme in an effort to inject liquidity into the banking sector, and to stimulate inflation.

The ECB has pledged to grow its balance sheet to €3tn from its current level of just over €2tn, through an asset-purchasing initiative. As it grows its balance sheet, it will lend more to banks in the hope that this liquidity will eventually find its way to the consumer market.

However, its early efforts appear to have been in vain. The Wall Street Journal reported on 11 November that the value of the ECB's assets held actually fell by €22bn last week, despite its covered bond purchasing plan.

Many have questioned the scope of the ECB's strategy. There are a finite number of covered bonds available for purchase and it's expected that eventually it will have to diversify its purchases, potentially to include corporate bonds. Some have called for the ECB to buy up sovereign bonds, but the German government is vehemently opposed to this action.

"The ECB's current approach is not working and doing more of the same will yield similarly disappointing results... The eurozone needs more substantial, effective monetary policy stimulus – and soon. The outlook for both growth and inflation has worsened and the ECB staff macroeconomic projections will be revised down, yet again, in December," wrote the BNP Paribas economist Ken Wattrett in a recent note.