Falling output of consumer goods pulled down euro zone industrial production in October and third-quarter employment shrank, data showed on Monday, indicating weak private demand and a fragile recovery ahead.

Industrial output in the 16-country euro currency area fell 0.6 percent month-on-month and 11.1 percent year-on-year, European Union statistics office Eurostat said. [ID:nBRQ009620]

Economists polled by Reuters had on average expected drops of 0.7 percent on the month and 10.9 percent year-on-year.

The marked relapse in industrial production in October is a sobering reminder of the fragility of the economic recovery in the euro zone, said Martin van Vliet, economist at ING.

But it is premature to conclude that the industrial recovery is seriously losing momentum, let alone that it has run its course, he said, pointing out that the less volatile three-month output rate showed a gain of 0.8 percent.

Durable and non-durable consumer goods production fell 1.4 and 1.6 percent respectively month-on-month, which economists said showed reluctance among consumers to spend.

At this early stage, these data suggest that the economy will not expand as quickly in the fourth quarter as the third quarter's 0.4 percent gain, said Jennifer McKeown, economist at Capital Economics.

Output fell in Germany, the euro zone's biggest economy, but the country's central bank said economic recovery would continue.

Despite the fall in industrial production (in October), the trend towards an industrial recovery is still intact, the Bundesbank said in a monthly report.

EMPLOYMENT DIPS

Separately, Eurostat said employment in the euro zone shrank 0.5 percent quarter-on-quarter in the July-September period, producing a 2.1 percent year-on-year fall.

The number of people with jobs fell 712,000 in the euro zone in the third quarter to 144.8 million. In the 27-nation European Union, employment fell 1.019 million to 221.6 million.

The third quarter's 0.5 percent drop in employment confirms that the recovery elsewhere in the economy has yet to feed through to the labour market, McKeown said.

The decline follows a 0.5 percent quarterly contraction in employment in the second quarter and a 0.7 percent fall in the first three months of the year.

Economists point out that without improvement in the labour market, wage growth will be limited, keeping household demand subdued.

The report confirms that job shedding continues unabated, and we expect only a modest improvement going forward. In our projections, job growth resumes only at end-2010, said Marco Valli, economist at Unicredit.

Labour market statistics tend to lag the rest of the euro zone economy, which emerged from recession in the third quarter and is expected to grow, albeit slowly, in the next three quarters.

Germany