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Italy slides back into recession, falls behind EU neighbours

The Italian economy shrank by 0.2 per cent in the second quarter, dragging the eurozone's third-biggest economy back into recession and further behind EU neighbours, data from the national statistics agency showed on Wednesday (Aug 6).

MILAN: The Italian economy shrank by 0.2 per cent in the second quarter, dragging the eurozone's third-biggest economy back into recession and further behind EU neighbours, data from the national statistics agency showed on Wednesday (Aug 6).

The contraction, which follows on the heels of a fall in the first quarter, will be a sharp blow for Prime Minister Matteo Renzi's government as the country struggles to pull out of the worst recession since World War II.

The news hit the Italian stock market which was showing a fall of 3.32 per cent minutes after the data was published.

The official Istat data agency said in an initial estimate that the gross domestic product had shrunk by 0.3 per cent from output in the same period last year, hitting the lowest second-quarter level for 14 years. The result was worse than expected, with analysts having forecast between a 0.1 per cent contraction to a 0.1 percent increase in growth.

"The Eurozone recovery, which began in spring last year and has gradually spread around most of the currency area, has not yet taken hold in Italy," said Christian Schulz, senior economist at Berenberg. "While Spain and Portugal were out of the blocks fast and have put themselves at or near the top of the Eurozone growth table courtesy of their sweeping reforms in the last three years, Italy continues to struggle," he said.

Azad Zangana, European economist at Schroders, agreed, saying the results underscored "the outperformance of countries that have implemented structural reforms and improved their competitiveness like Spain and Ireland."

'NO SHORTCUT TO GROWTH'

Explaining the drop, Istat said the value added contracted in industry, services and agriculture. Domestic demand was growth neutral, whilst net exports were a drag on growth, it said. Industrial production rose 0.9 per cent month-on-month in June but contracted by 0.4 per cent in the second quarter, mainly due to a lapse in May, separate data showed on Wednesday.

Italy "is struggling to pull out of the recession because it is a very deep one," Finance Minister Pier Carlo Padoan said in an interview with Il Sole 24 Ore. He insisted however that the country would not breach the European Union's three-percent deficit ceiling "either in 2014 or 2015." "There are no shortcuts to a return to growth. We have to remove the obstacles in our path through reforms," he said.

European Commission economic affairs spokesman Simon O'Connor agreed, saying that "only through structural reforms ... can the conditions be put in place for a sustainable recovery."

Renzi, who came to power in February after ousting his predecessor for failing to do enough to revive growth in Italy, has made difficult and often contentious reforms the keystone of his leadership.

"We have been seeing market optimism regarding Italy based on Renzi's optimism and drive for reforms, but the growth result may put a damper on that," said Martin Lueck, European Economist with UBS. He also warned that "Italy has strong exposure to Russia and the Middle East, which adds to its problems," with key energy and trade links somewhat at the mercy of political instabilities.

It is the third time Italy has slipped into recession since 2008, pulling free for the second time in the fourth quarter of last year with growth of 0.1 per cent.