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Business News/ Politics / Policy/  Italy’s GDP drops, shows country in recession
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Italy’s GDP drops, shows country in recession

GDP falls 0.2% in second quarter, youth unemployment is at more than 40% with sovereign debt of about 2 trillion

Italy Prime Minister Matteo Renzi is under pressure to quickly turn around the euro region’s third-biggest economy. Photo: BloombergPremium
Italy Prime Minister Matteo Renzi is under pressure to quickly turn around the euro region’s third-biggest economy. Photo: Bloomberg

Rome: Italy’s economy unexpectedly shrank in the second quarter, falling back into recession and extending a slump that’s lasted most of the past three years.

The gross domestic product (GDP) fell 0.2% from the previous three months, when it declined 0.1%, the national statistics institute Istat said in a preliminary report in Rome on Wednesday. That compares with the median forecast of a 0.1% expansion in a Bloomberg survey of 22 economists. Output was down 0.3% from year earlier.

“A lack of re-stocking and poorer-than-expected exports seem good candidates to explain the surprise," said Paolo Pizzoli, an economist at ING Bank in Milan.

“Domestic demand excluding inventories was probably only mildly up," he said.

Italy’s GDP has been dropping for the last three years, with the only exception of the last quarter of 2013, when it posted a 0.1% increase.

With Italian youth unemployment at more than 40% and sovereign debt of about €2 trillion ($2.7 trillion), Prime Minister Matteo Renzi is under pressure to quickly turn around the euro region’s third-biggest economy. Lower than expected growth may undermine his plans to bring the country’s deficit-to-GDP ratio to 2.6% this year and start reducing Europe’s second-biggest debt.

Italy’s 10-year yield was up 4 basis points to 2.79% at 1:35pm Rome time, pushing the difference with comparable German Bunds to 168.2 basis points.

Under Pressure

“At best, we expect no growth in 2014, and an expansion of just 1% in 2015, partly driven by the recent tax cuts and European Central Bank credit easing," Daniele Antonucci, senior European economist at Morgan Stanley, said in a note to clients.

Both measures are likely to have little effect, he said.

“Renzi has acknowledged that annual GDP growth will probably fall well below the Treasury’s 0.8% forecast, while the government’s debt reduction plans also seem to be yielding disappointing results," Wolfango Piccoli, managing director at Teneo Intelligence in London, wrote in a research note this week.

Under present conditions, and assuming a more realistic growth rate of 0.3%, the cabinet will need to find at least €15 billion to €16 billion to keep its 2014 deficit reduction plans on course, he said.

Modest pick-up

The Bank of Italy last month lowered its growth forecast for this year to 0.2%, less than a third of its previous prediction. Even so, industrial production increased 0.9% in June, Istat said earlier on Wednesday. That beat the median economist forecast of 0.8%.

“While the third quarter should see a modest pick-up in personal consumption and gross fixed investment, the Italian economy and banking industry are among the most exposed to Russia’s economic instability," Riccardo Barbieri, the London- based chief European economist at Mizuho International Plc, said in a 31 July research note.

“Even the 0.3% increase we have pencilled in for the third quarter would be a good result given the current circumstances," he said. Bloomberg

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Published: 06 Aug 2014, 06:58 PM IST
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