Euro zone industrial production was much stronger than expected in August, data showed today, indicating the economic slowdown in the third quarter might be smaller than feared.

The European Union's Statistics Office said industrial production in the 17 countries using the euro rose 1.2 per cent month-on-month in August for a 5.3 per cent year-on-year increase.

Economists polled by Reuters had expected a 0.7 per cent monthly decline in output and a 2.2 per cent year-on-year increase.

"Even if production were to fall markedly in September, the quarterly growth rate would still be higher in Q3 than in Q2, which poses an upward risk to our forecast of the economy contracting in Q3," said Aline Schuiling, a Senior Economist at ABN Amro Bank NV.

But the euro zone economy will still slow down markedly and it is likely to show already in the September output figures.

"Hard industrial production data will probably show tangible signs of weakening starting with the September figure, as Germany has already seen two consecutive months of declining orders, while Italy will most likely witness a large correction after the suspicious surge in August output," said Marco Valli, Chief Euro zone Economist, Unicredit Research.

"All this suggests a clear deterioration of the industrial production dynamics entering the fourth quarter, and flags a substantial risk - no less than 30 per cent - that euro zone gross domestic product will contract in the final quarter of the year (our current forecast: flat)," Mr Valli said.

The European Commission expects economic growth in the euro zone to slow to 0.1 per cent quarter-on-quarter in the third and fourth quarters of 2011 from 0.2 per cent in the April-June period, largely because of the negative impact on confidence from the sovereign debt crisis.

The August data showed that the annual increase in the production of capital goods, used for investment, jumped 12.2 per cent and the output of durable consumer goods, an indication of consumer confidence, rose 2.8 per cent in annual terms.

In the euro zone's biggest economy, Germany, output fell 1 per cent month-on-month but was still 7.8 per cent higher than a year earlier.

Ireland showed a production jump of 4.4 per cent month-on-month and 10.1 per cent year-on-year.

Reuters