October 30, 2018 / 9:06 AM / in 9 months

Italy's economy stagnates in third quarter amid budget row with Brussels

ROME,(Reuters) - - Italy’s economy ground to a halt in the third quarter, data showed on Tuesday, as both domestic demand and trade flows failed to spur any growth.

Gross domestic product was unchanged between July and September, following a 0.2 percent rise in the second quarter, and was up 0.8 percent on an annual basis, national statistics bureau ISTAT reported.

That lagged an average forecast of a 0.1 percent rise quarter-on-quarter, up 0.9 percent year-on-year in a Reuters survey of 28 analysts.

Growth in the euro zone’s third largest economy has been slowing steadily since the start of 2017.

The flat quarterly reading in the third quarter was the weakest result since the fourth quarter of 2014.

This month the government, which took office in June, cut the official full-year 2018 forecast to 1.2 percent from a 1.5 percent projection made in April by the previous administration.

Achieving even the revised target would require a marked acceleration in the fourth quarter.

The new coalition of the anti-establishment 5-Star Movement and the right-wing League has presented an expansionary 2019 budget it says is needed to boost growth and prevent Italy’s chronically sluggish economy slipping into recession.

However the budget, which targets the deficit to rise to 2.4 percent of gross domestic product in 2019 from 1.8 percent this year, was rejected last week by the European Commission.

The EU executive said Italy was flouting a previous commitment to lower the deficit steadily towards a balanced budget, and gave Rome three weeks to present a new budget. The government says it has no intention of changing its plans.

ISTAT made no revision to the second quarter, when GDP rose 0.2 percent quarter-on-quarter and 1.2 percent year-on-year.

ISTAT said that in the third quarter both trade flows and domestic demand had made neutral, or zero contribution to economic growth.

It gave no numerical breakdown of components with its preliminary estimate, but said the services and agricultural sectors expanded while industry was a drag on growth.

ISTAT said so-called called “acquired growth” at the end of the third quarter stood at 1.0 percent.

This means that even if GDP were to be flat quarter-on-quarter in the last three months, over the whole of 2018 it would still be up 1.0 percent from 2017.

The government has forecast growth will accelerate to 1.5 percent next year thanks to increased investment, tax cuts and a new income support scheme it says can boost consumer spending. The EU Commission says the growth forecast is too optimistic.

Gavin Jones, +39 06 8522 4232, fax +39 06 854 0568; rome.newsroom@news.reuters.com

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