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Euro zone factories rebound in July, but output still weak

File picture shows the illuminated euro sign in front of the headquarters of the European Central Bank (ECB) in Frankfurt April 5, 2011.

KAI PFAFFENBACH/REUTERS

Euro zone factories increased output by more than expected in July but were still worse off than a year ago as households cut back on spending, and more recent manufacturing surveys point to crumbling consumer demand even in the bloc's biggest economies.

Industrial production in the 17 countries sharing the euro rose 0.6 per cent in July from June, the EU's statistics office Eurostat said on Wednesday, better than forecasts of economists polled by Reuters, who had expected no growth in the month.

But factory output was still down 2.3 per cent compared to the same month a year ago, and demand for consumer goods underscored the deep impact of the euro zone debt crisis.

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Production of durable consumer goods such as televisions, washing machines and cars fell nearly 10 per cent in July compared to the year-ago period.

Output of other consumer goods including food fell more than 2 per cent from the same period of last year, as households struggle with record joblessness, government cutbacks and the high cost of energy.

After nearly three years of crisis, the euro zone is slipping into its second recession since 2009 and the lack of domestic demand drove down the bloc's gross domestic product in the April-to-June period by 0.2 per cent.

Factory output is typically a very volatile reading of the economy, but order books reflect the downturn and a leading business survey in August showed the euro zone's manufacturing sector contracting faster than initially expected.

Markit's final Purchasing Managers' Index (PMI) for the euro zone manufacturing sector fell from an earlier flash reading of 45.3 to 45.1 in August, notching its 13th month below the 50 mark separating growth from contraction.

The European Central Bank cut interest rates to a record low of 0.75 per cent in July to reduce the cost of bank lending for families and companies and could cut again at its meeting in October.

But that may not be enough, with business confidence suffering badly from the uncertainty surrounding the future of the indebted euro zone, as politicians squabble over how best to resolve the crisis.

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"Time and again, we have allowed doubts to spread," European Commission President Jose Manuel Barroso said in a state of the union speech on Wednesday. "If Europe's political actors do not abide by the rules and the decisions they have set themselves, how can they possibly convince others that they are determined to solve this crisis together?"

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