Euro zone industrial production declined in June, with output in France and Germany falling sharply, but a strong showing over the second quarter as a whole suggests Friday's GDP data for the bloc will be robust.

Output fell 0.1 percent month-on-month, figures released by Eurostat on Thursday showed, and rose 8.2 percent year-on-year, although the drop followed sharp increases in April and May.

After a string of upbeat economic data from the 16 countries that share the euro single currency in recent weeks, the output figures indicate momentum may have faltered late last quarter although the data are volatile and forward-looking reports for the third quarter have so far been positive.

The European Central Bank said on Thursday the euro zone economy strengthened in the second quarter and third quarter data so far had been better than expected.

But with signs of U.S. growth stalling, and indications that China, the world's second largest economy, may also have pulled back from the peak of its expansion, the euro zone growth outlook in the months ahead could be dampened.

We would expect production to weaken in the future, said Ken Wattret, chief euro zone economist at BNP Paribas. We are seeing evidence that the U.S. economy and China are losing momentum. Europe will suffer from that over the next 6 months.

A flash estimate of euro zone gross domestic product for the second quarter is to be released on Friday. Economists polled by Reuters expect a solid 0.7 percent quarter-on-quarter gain, following anemic 0.2 percent growth in the first quarter.

Offsetting some of June's disappointment was an upward revision to earlier data, with Eurostat saying industry output rose 1.1 percent in May, for a 9.9 percent year-on-year gain, following a solid 0.8 percent increase in April.

I was looking for a further increase in June but we've seen in recent months that it's a volatile series, Citigroup economist Juergen Michels said of the industry figures.

But I would not exaggerate this reading and given the strong backing from orders, I expect further gains in production in the coming months.


While the euro zone has produced a stream of encouraging data on inflation and consumer and business sentiment, there is yet to be a clear flow-through to consumer demand, which will be the major driver of any sustained upturn in economic growth.

With euro zone unemployment holding steady at 10 percent -- a 12-year high -- and many economies in the region looking to cut public-sector pay as part of a wide-ranging austerity drive, consumer demand is likely to remain restrained, or at least lead to a two-speed recovery in the bloc.

The industrial production figures were pulled down by a poor performance in Germany and France, the euro zone's two biggest economies, with German output declining 0.5 percent during the month and France's production down 1.6 percent.

But again, those falls followed strong increases in April and May.

Production in the Netherlands fell a heavy 3.1 percent, but rose 0.6 percent in Italy.

Overall in 2010, euro zone gross domestic product is expected to grow 0.9 percent -- according to European Commission forecasts -- and the area remains on target as it claws its way back from the worst economic crisis in decades.

A Reuters poll of economists, published on Tuesday, forecast 1.2 percent growth this year.

The Federal Reserve said this week that the pace of the U.S. economic recovery had slowed in recent months, prompting the central bank to take new stimulatory measures.

In contrast, the European Central Bank has sounded confident and gives no signs of offering further stimulus.

The ECB has been slowly phasing out extra liquidity and is due to decide in September whether to extend its policy of unlimited lending at operations for up to three months, although no change in key rates is seen until the third quarter of 2011.

(Editing by David Brunnstrom/Mike Peacock)