Industrial output in the eurozone increased 0.5 percent in December from November, less than forecast and confirming the area's weaker-than-expected economic performance, Eurostat data showed on Friday. Compared with December 2003, the European Union's statistics agency said industrial output in the 12 nation single currency area was 1.0 percent higher. The monthly and annual increase in output was smaller than expected by analysts polled by Reuters who, on average, expected industrial production to rise 0.5 percent month-on-month and 1.2 percent year-on-year.

The data confirmed the eurozone's weaker than expected economic performance in the fourth quarter of 2004, which was highlighted last week by poor economic growth estimates.

"The strength of the euro, high oil prices, softer global growth compared to the first half of 2004, and persistently weak domestic demand in many Eurozone countries remain significant problems for the manufacturing sector," said Howard Archer, analyst at Global Insight.

Nevertheless, output in 2004 expanded from 2003, the European Commission said. On average output last year rose 1.9 percent from 2003, when output only rose 0.2 percent following a 0.5 percent contraction in 2002.

Eurostat also revised the monthly decline in November to 0.4 percent from 0.3 percent and the annual increase to 0.3 percent from 0.5 percent.

Economists had expected a healthy gain in eurozone output following strong performances by Germany and France, which spurred hopes that growth would continue into 2005.

But output from Italy, the third-largest economy, dropped for a third month in a row, illustrating the fragile state of the recovery.

A breakdown showed the monthly output of durable goods in December was up just 0.4 percent, while energy output increased by 1.6 percent. Capital goods output fell by 0.4 percent.

It is now clear the eurozone lost much more speed in the final quarter of last year than expected and it remains to be seen whether it turns out to be a bottoming out, as Otmar Issing, chief economist of the European Central Bank predicted.

Growth expanded by a mere 0.2 percent from the third quarter - its weakest rate in 1-1/2 years and half the growth rate expected by economists, with both Germany and Italy shrinking.

So far, EU finance ministers are putting a brave face on the lacklustre fourth quarter growth and remain upbeat about the prospects for 2005, with Dutch Finance Minister Gerrit Zalm saying this week that he remained optimistic about recovery. The December output rise also came in spite of the euro's surge to a record high above US $1.36 in the month.

Economists say there has been little anecdotal evidence that the euro's strength had a negative impact on manufacturing in December or January.

Copyright Reuters, 2005