A sharper than expected decline in industrial production has weakened the prospects of a recovery in the eurozone economy in the final month of last year.
Industrial production in the single currency zone slid 2.1 per cent in December, according to figures published by Eurostat on Wednesday, confirming earlier reports of sharp drops in factory output in Germany, France and Italy.
In the year to December, eurozone industrial production was down 4.1 per cent — its weakest performance since the region’s sovereign debt crisis in 2012.
The news came as economists revised down their forecasts for eurozone economic growth in the current quarter and tried to assess how seriously the outbreak of the deadly coronavirus in China would disrupt European manufacturers’ exports and supply chains.
Improving sentiment in recent surveys of eurozone companies had fuelled hopes that the region’s industrial sector was set to rebound from its two-year downturn. However, the disruption of the coronavirus to the Chinese economy and to global supply chains has caused economists to cut their estimates for eurozone growth.
“European car manufacturers in particular are already warning of potential shortages of components due to factory shutdowns in China,” said Jessica Hinds, economist at Capital Economics. “So even if the virus is soon brought under control, eurozone industry is likely to remain in recession in at least the early part of this year.”
On Friday, fourth-quarter growth figures are due to be published for both the eurozone and Germany. Economists fear that the sharp decline in manufacturing in December could weigh on the growth figures and potentially drag both into negative territory.
Jolien van den Ende, fixed-income strategist at ABN Amro, predicted that the European Central Bank would cut rates further into negative territory and increase the size of its bond-buying programme as early as next month in response to the worsening economic outlook.
“Given our macro scenario of growth below the trend and dislodged inflation expectations we expect the ECB to ease again going forward,” said Ms van den Ende.
Philip Lane, the ECB’s chief economist, said that coronavirus was a “wild card” that could produce a “pretty significant short-term hit on the economy”.
Speaking at an event in Dublin on Wednesday, Mr Lane said evidence from previous health crises suggested a sharp hit to growth in the short term as projects were paused, but added that this was typically followed by a “significant bounceback” once the crisis passed.
“We’re keeping a very close eye on this,” he said, adding that “forward guidance”, which the ECB uses to communicate the likely future path of interest rates, could do “quite a bit for these kind of intermediate events”.
The ECB’s next monetary policy meeting is on March 12, but most economists doubt that it will rush to loosen monetary policy.
“Based on recent comments from ECB officials, the bar for further easing still looks fairly high,” said Frederik Ducrozet, strategist at Pictet Wealth Management. “At the very least it looks unclear how big a drop in the February business surveys would be required for the ECB to cut rates as soon as next month — probably a very large one.”
Source: Economy - ft.com
