European Industrial Output Plunges Most in 15 Years

By Fergal O’Brien

Dec. 12 (Bloomberg) -- European industrial production plunged the most in 15 years in October as orders weakened and the region’s biggest companies cut investment.

Output fell 5.3 percent from a year earlier, the biggest decline since July 1993, the European Union statistics office in Luxembourg said today. From the previous month, production fell 1.2 percent. A separate report showed labor-cost growth accelerated to 4 percent in the third quarter from 2.8 percent.

The European Central Bank on Dec. 4 lowered its key interest rate by an unprecedented 75 basis points to 2.5 percent to tackle a deepening recession. While manufacturing and services surveys and consumer-confidence data point to further contraction ahead, some ECB policy makers indicate they see limited scope for further reductions.

“They may not come in January, they may come in smaller magnitudes, but additional easing from the ECB will come,” said Martin van Vliet, an economist at ING Group in Amsterdam. “It is inevitable.”

The ECB’s capacity to attack the economic slump with interest- rate cuts has improved as plunging oil prices cool inflation. The central bank already has lowered its key rate from 4.25 percent in early October and Europe’s inflation rate fell by the most in almost two decades last month to 2.1 percent.

New Forecasts

It published new forecasts this month, projecting that the euro area economy will shrink about 0.5 percent next year.

“The escalation and broadening of the financial turmoil should dampen demand for an extended period, globally and in the euro region,” ECB governing council member Yves Mersch said in Luxembourg today. He also said there will “not be considerable and significant information available before February, March,” suggesting the ECB may not reduce rates in January.

The labor-cost report showed that wage growth accelerated to 3.8 percent in the third quarter from 2.7 percent in the second. Other labor costs rose 4.4 percent.

“In the current environment, the ECB should be much more concerned by the steep industrial production and GDP drop than accelerating labor costs,” said Marco Valli, an economist at Unicredit MIB in Milan. The latter “still reflects the past strength of the labor market, which is now gone.”

Alcatel-Lucent SA, the world’s largest maker of fixed-line networks, said today it will cut costs by 1 billion euros ($1.3 billion) in each of the next two years, including the elimination of 1,000 more managerial jobs, as it tries to curtail losses. Ford Motor Co. is planning to slash European production by about 10 percent next year in response to the weakening market.

Economists expected a 3.8 percent decline in October from a year ago, according to the median of 28 estimates in a Bloomberg survey. They had forecast a 1 percent drop on the month.

In Germany, Europe’s largest economy, production fell 3.8 percent from a year earlier, today’s report showed. French output plunged 7.5 percent, while Italian production dropped 6.9 percent.

To contact the reporter on this story: Fergal O’Brien in Dublin at fobrien@bloomberg.net.