France drags on slow euro zone recovery

Reuters

* Euro zone recovery spreading but French factory outputstill contracting

* Robust gains seen in struggling countries

* Inflationary pressures remain weak

By Jonathan Cable

LONDON, Nov 4 (Reuters) - The euro zone economic recoverythat began in Germany has spread to some smaller members butshrinking French manufacturing is hampering a more robustrebound.

Business surveys released on Monday showed factoryproduction in the 17-nation bloc accelerated as expected inOctober, getting close to August's 26-month high, but still weak compared with historical levels.

Markit's final Manufacturing Purchasing Managers' Index(PMI) rose to 51.3 in October from 51.1, in line with an earlierflash reading and with the consensus forecast of economists. Ithit a 26-month high of 51.4 in August.

But Germany and France, the bloc's two biggest economies,went in opposite directions.

Germany showed activity picked up last month, with its indexrising to 51.7 from 51.1. In France manufacturing activityshrank to 49.1, its 20th month below the 50 market that dividesgrowth and contraction.

Trouble spots Spain and Italy also diverged, with bothgrowing but the latter at a slower pace than previously.

The lack of substantial growth overall, and with pricesbarely rising last month, has heightened some expectations theEuropean Central Bank will cut interest rates from alreadyrecord lows when it meets later this week.

An index measuring output, which feeds into a composite PMIdue on Wednesday that provides a good indicator of overallgrowth, rose to 52.9 from 52.2.

"On past performance it is still only consistent with prettyweak industrial production growth. It's rising - but it's hardlyat booming levels," said Ben May at Capital Economics.

Healthy growth in Germany, Europe's biggest economy, pulledthe troubled region out of its longest recession in the secondquarter, but it will probably only grow 0.2-0.3 percent eachquarter through to the end of next year, according to Reuterspolls.

France, the euro zone's second-largest economy, shook off ashallow recession in the second quarter withbetter-than-expected growth of 0.5 percent, but French nationalstatistics office Insee forecasts a flat third quarter.

"The GDP figures for the second quarter certainly overstatethe underlying pace of growth in France and these latest numbersunderline the point that is not in the midst of a strong andsustained recovery," May said.

Still, euro zone sentiment unexpectedly rose in November,jumping to its highest since May 2011 after a blip in Octoberdue to the U.S. fiscal crisis, a survey by research group Sentixshowed on Monday.

INFLATION PRESSURES WEAK

Demand for manufactured goods increased last month, althoughnot as fast as in September, and factories made little change toprices, despite rising input costs.

The output prices sub-index nudged up to an 18-month high of50.5 from 50.3 but was down from the 50.7 flash reading.

Euro zone inflation fell to just 0.7 percent in October,official data showed last week, well short of the EuropeanCentral Bank's goal of just under two percent.

While a Reuters poll last week did not predict a cut ininterest rates from their record low of 0.5 percent when theGoverning Council meets this week, Thursday's inflation dataprompted some economists to forecast a cut.

"We don't anticipate any policy move from the ECB at theNovember meeting," said Annalisa Piazza at Newedge Strategy.

"However, we see increasing risks that the ECB might cut itsrefinancing rate by 25 basis points at the December meeting andfurther liquidity injections cannot be ruled out in early 2014."

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