By Robin Emmott
BRUSSELS (Reuters) - Euro zone factory output continued its steep fall in autumn this year, underscoring the feeble domestic demand that risks prolonging the bloc's recession.
Industrial production in the 17 countries sharing the euro fell 1.4 percent in October after falling sharply percent in September, the EU's statistics office Eurostat said on Wednesday. That was much worse than the modest growth expected by economists in a Reuters poll.
Factories had proved surprisingly resilient over the European summer, posting two months of moderate gains, but the new data supports forecasts of a third quarterly contraction in the euro zone's economy in the October-to-December period.
After three years of a debt crisis that has driven unemployment to a record level and pushed governments to slash spending, the economy is caught in a spiral: households are not spending and so companies are not selling, forcing them to cut staff which then further weakens consumption.
"Domestic demand will only turn around when uncertainty among the companies about the fate of the euro has been dispelled, prompting them to increase investment again," Ralph Solveen, an economist at Commerzbank, wrote in a research note.
Policymakers in the euro zone, which generates a fifth of global output, are divided over the chances of an economic recovery next year but the European Central Bank has downgraded its forecasts for 2013 and expects any rebound to come in the second half of next year.
The bloc's 9 trillion euro economy is likely to contract at least 0.4 percent this year, marking its second recession since 2009 and contrasting with the United States and much of Asia and Latin America, where growth is gradually returning.
The ECB held off from another cut in the cost of borrowing at its Governing Council meeting last week, but could take its interest rate to below the current 0.75 percent level in 2013, as inflation falls towards its target.
Germany, France and Italy, which make up two-thirds of the euro zone's industrial production, all saw their factory output contract for the second consecutive month in October, with Germany, the euro zone's biggest economy, falling the most.
At the euro zone level, only production of consumer goods such as food and cosmetics rose in October, with all other sectors falling. Output of cars, electronics and furniture fell almost 4 percent.
Investors and businesses are hoping the slump is reaching its lowest point. Business surveys over the past few weeks show euro zone manufacturing may be ready to rebound, with managers reassured by the ECB's plan to buy the bonds of euro zone countries in trouble, dramatically reducing the chances of a collapse of the currency area.
"The figures published today are very bad, but the good news is that the recession in Europe has probably hit the lowest point and a recovery might start from the second quarter of 2013 onwards," said Peter Vanden Houte, an economist at ING.
Much uncertainty for businesses remains. The European Union is struggling to agree on a banking union, the first step in a new phase of integration meant to underpin the euro.
Italian Prime Minister Mario Monti's decision to leave office early also illustrates the fragile political situation in the euro zone's third largest economy.
"A lot of things can still go horribly wrong," Vanden Houte said.
(Reporting by Robin Emmott; Editing by Rex Merrifield and Catherine Evans)