Finance & Business World

French and Italian industrial output surged in August, fueled by government incentives to buy new cars, adding to signs that stimulus spending is helping the euro-region economy emerge from its worst recession in 60 years.

French output rose 1.8 percent, from July, dwarfing the 0.3 percent median forecast by 22 economists surveyed by Bloomberg. Italian production jumped 7 percent in August, the biggest monthly increase in at least 20 years.

The gains in manufacturing in France and Italy, which account for more than a third of the euro-region economy, provide further evidence that the euro region will expand in the three months through September, after five quarters of contraction. European manufacturing also grew more than initially estimated in September, a report showed this week.

“Manufacturing activity will finally stop being a drag on growth in third quarter,” said Annalisa Piazza, an economist at Newedge Group in London. “Today’s data, coupled with the upswing in German industrial production in August, will lead to an upswing in euro-zone output figures in August of around 3 percent month on month, much stronger than previously anticipated.”

The euro-area economy barely contracted in the second quarter as Germany and France, the region’s largest economies, returned to growth. The euro area will expand 0.3 percent in 2010, the International Monetary Fund said on Oct. 1, when it trimmed its estimate for this year’s contraction to 4.2 percent.

Car Incentives

Manufacturing in both France and Italy has been propped up by government stimulus measures, including a payment of 1,000 euros ($1,473) for buyers who trade in older cars for less- polluting models. President Nicolas Sarkozy’s government intends to extend the program into next year, though it will be scaled back and Italy is also considering an extension overnight pay day loans.

French car production surged 19 percent in August from the previous month, while in Italy output of motor vehicles, including cars and trucks, gained 12.9 percent, today’s reports said.

Manufacturing “is mainly benefiting from the car-incentive schemes, although output of other manufactured products is also rising,” said Joost Beaumont, an economist at Fortis Bank Nederland. This suggests “that the pickup in world trade and the turn in the inventory cycle are also leaving their mark.”

Even with the gains in production and demand, joblessness is still rising across the EU. With some government-stimulus measures starting to expire and the euro’s 18-percent gain against the dollar since February weighing on exports, policy makers including European Central Bank President Jean-Claude Trichet have warned the economic pickup may be uneven.

Exit Strategies

Trichet has also called on governments to figure out how to withdraw the billions of euros of stimulus measures used to combat the worst recession in 60 years to avoid fueling inflation as growth begins to accelerate. Trichet yesterday demanded that lawmakers execute “ambitious” plans to reverse the region’s largest budget deficit since the euro began trading in 1999 “as soon as possible and at the latest when the recovery takes hold.”

Failure by politicians to devise a plan and then carry it out may fuel debt and inflation, forcing the Frankfurt-based ECB to raise interest rates faster in the recovery, according to economists at Goldman Sachs Group Inc. and Barclays Capital.

The ECB left its benchmark rate unchanged yesterday at a record low 1 percent.

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