Italy back in recession as economy shrinks 0.2% in second quarter

Wednesday 06 August 2014 11.34
The Italian economy shrank by 0.2% in the second quarter
The Italian economy shrank by 0.2% in the second quarter

Italy slipped into recession for the third time since 2008 in the second quarter, underlining the chronic weakness of the euro zone's third-largest economy.

Figures today from statistics agency ISTAT showed gross domestic product unexpectedly declined by 0.2% in the three months from April to June from the previous three months.

A Reuters poll of economists had forecast growth of 0.2%. 

Italy's economy also shrank by 0.1% in the first quarter, meaning it has returned to recession, defined as two consecutive quarters of contraction. 

In a newspaper interview before the data release, Economy Minister Pier Carlo Padoan said that despite indications growth would fall short of forecasts on which 2014 tax and spending plans are based, Italy would not need an emergency budget. 

Repeating previous assurances, he told business daily Il Sole 24 Ore that Italy would report a budget deficit within the European Union's ceiling of 3% of GDP. "The 3% limit will not be breached in 2014 or in 2015. There will be no need for a supplementary budget," he told the newspaper. 

The government's official projections for 2014 see growth of 0.8% and a deficit of 2.6% of GDP, but both Padoan and Prime Minister Matteo Renzi have said conditions have turned out worse than expected. That has fuelled growing speculation that extra measures may be needed to meet EU budget targets. 

Calmed by the European Central Bank, financial markets have recovered since 2011 when Italy was at the centre of a crisis that threatened the future of the entire euro zone.

But today's data highlighted the lack of progress in addressing the fundamental problems of a economy that has been almost stagnant for more than a decade. The Bank of Italy said last month that GDP had contracted by 9% since the global financial crisis began in 2007. 

Renzi has announced ambitious labour and tax reforms to revive growth and sweeping overhauls of the justice system, the bloated public administration and Italy's system of government. 

Beyond an €80 per month tax break for millions of low income workers, he has yet to translate his promises into action, however, and his energies have been taken up for weeks by a draining parliamentary battle over constitutional reform. 

Even the impact of the tax break has been questioned after the head of Italy's retail association Confcommercio said the effect on consumption had been "almost invisible". 

Padoan said that there was no alternative to the reforms the government has begun but that results would take time. 

"Italy is struggling to emerge from the crisis because it has built up structural obstacles. There are no shortcuts to get back to growth: we have to remove the obstacles with structural reforms," he told Il Sole 24 Ore. 

Last month, the Bank of Italy cut its growth forecast to just 0.2% for 2014, in line with forecasts from other bodies including the International Monetary Fund and the Organisation for Economic Cooperation and Development. 

The data offer some encouraging signs for the government. ISTAT said industrial output, which in Italy is usually closely correlated with GDP, rose 0.9% month on month in June driven by gains in investment and consumer goods, after posting its steepest drop since 2012 in the previous month.