January 31, 2019 / 12:53 PM / in 3 months

Italy fourth quarter GDP contracts, throwing economy into recession

ROME (Reuters) - Italy’s economy contracted for the second consecutive quarter at the end of last year, throwing the country into recession in a setback for the new anti-establishment government.

FILE PHOTO: Buildings are seen in the Porta Nuova district in Milan, Italy, March 27, 2017. REUTERS/Stefano Rellandini

Gross domestic product fell a quarterly 0.2 percent between October and December, following a 0.1 percent decline in the third quarter, and was up 0.1 percent on an annual basis, national statistics bureau ISTAT reported on Thursday.

The fourth quarter decline was steeper than expected. A Reuters survey of analysts had pointed to a 0.1 percent fall quarter-on-quarter and a 0.3 percent year-on-year rise.

Analysts often define two straight quarters of declining GDP as a “technical” recession, though the Italian economy grew in 2018 as a whole and is expected to expand modestly this year.

The data confirmed Italy’s customary position among the growth laggards of the euro zone. The 19-nation bloc grew a listless 0.2 percent in the fourth quarter, Eurostat said, in line with market expectations.

That was the same rate as in the third quarter, which had been the lowest for four years, while the euro zone’s 1.2 percent year-on-year expansion was a new five-year low.

The data presents a quandary for the European Central Bank, which ended its bond-buying stimulus programme late last year and risks running low on firepower as the economy slows.

In December the ECB forecast fourth quarter growth of 0.4 percent, double the final outturn, and its full-year 2019 forecast of 1.7 percent already looks ambitious.

The Italian government which took office in June last year was quick to blame its centre-left predecessors for the latest slump. Deputy Prime Minister Luigi Di Maio said the data “certified the failure of the entire political class which Italians sent packing” at last year’s election.

Prime Minister Giuseppe Conte said government measures would ensure a firm recovery from the second half of this year.

Conte pointed out the euro zone’s third-largest economy has been weakening since early 2017 and has recently been hit by a slowdown in main trading partners such as China and Germany.

Critics say the coalition parties worsened the situation by fighting with Brussels over fiscal policy, damaging market confidence which pushed up Italy’s borrowing costs and hurt the economy.

WEAK DOMESTIC DEMAND

Over the whole of 2018, growth came in at 1 percent, down from 1.6 percent in 2017.

In the third quarter, GDP contracted by an unrevised 0.1 percent, the first fall in four years, and rose 0.6 percent annually, revised down from a previously reported 0.7 percent.

ISTAT said the quarterly contraction at the end of the year was due to a fall in domestic demand, which outweighed a positive contribution from trade flows.

It gave no numerical breakdown of components with its preliminary estimate, but said industry and agriculture had been negative, while the service sector was “substantially stable”.

The government of the anti-establishment 5-Star Movement and the right-wing League has targeted GDP growth of 1 percent this year, but most independent bodies expect it to be little more than half that.

A Reuters survey of 46 economists published this month forecast 2019 growth of 0.7 percent. The Bank of Italy and the International Monetary Fund both forecast 0.6 percent.

“We expect GDP to expand by 0.5 percent in 2019, and this underpins our expectation Italy’s GDP will return to modestly positive quarterly growth during the year,” UniCredit economist Loredana Federico said after the Q4 figures.

“Focus now seems to have shifted towards further weakness from abroad, away from domestic-specific weakness.”

The coalition approved an expansionary budget in December aimed at heading off the growing threat of recession.

FILE PHOTO: Italy's Prime Minister Giuseppe Conte awaits to welcome participants as they arrive to attend the first day of the international conference on Libya in Palermo, Italy, November 12, 2018. REUTERS/Guglielmo Mangiapane/File Photo

The budget, which was watered down after European Commission objections it would not lower Italy’s high public debt, features a new income support scheme for the poor and allows people to retire earlier. It also slashes taxes for the self-employed.

ISTAT said in November the budget would support private consumption this year, and forecast growth of 1.3 percent, but since then the international outlook has darkened.

Italy has been the euro zone’s most sluggish economy since the start of monetary union, and few analysts believe the budget can turn things around in the face of a broad European slowdown, trade tensions and Italy’s chronically stagnant productivity.

Reporting by Gavin Jones; Additional reporting by Francesca Piscioneri and Giuseppe Fonte; Editing by Catherine Evans

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