Italy falls into recession after economy shrinks by 0.2%

  31 January 2019    Read: 2417
Italy falls into recession after economy shrinks by 0.2%

Italy has fallen into recession after its economy shrank by 0.2 percent in the final three months of 2018.

Gross domestic product in the eurozone's third-largest economy fell 0.2 per cent between October and December, following a 0.1 per cent decline in the third quarter, Italy's national statistics office ISTAT reported on Thursday.

Analysts had predicted a 0.1 per cent fall quarter-on-quarter, according to Reuters.

Italy has now entered its third recession in 10 years. Its economy has been weakening since early 2017 and has recently been hit by a slowdown in key trading partners including Germany and China.

Italy's government has also been involved in a fight with Brussels over the country's budget deficit which critics say has damaged market confidence, pushing up Italy’s borrowing costs and hurting the economy.

Those borrowing costs have reduced since a budget compromise was reached, with Italy's 10-year bond yield at 2.6 per cent on Thursday, down from a peak of 3.7 per cent in November.

The administration in Rome, made up of the populist Five Star Movement and the far-right League party, had originally said it would let its budget deficit rise to 2.4 per cent of GDP in 2019, breaking EU rules that state structural deficits must fall steadily.

The extra borrowing was set to fund a “basic citizens’ income”, a lower retirement age and tax cuts.

Prime Minister Giuseppe Conte said on Wednesday that conditions were in place for a recovery over the second half of 2019.

Over the whole of 2018, growth came in at 1 per cent, down from 1.6 per cent in 2017. Despite the news, the euro was broadly flat against the dollar and the pound on Thursday morning.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics said: "Overall, these data don’t look pretty, but have been well telegraphed by the hard data and the financial market horror show in Q4.

Markets may even look on the figure as "good news", Mr Vistesen said, adding that they would be brave to do so.

"[The data] indicate that things probably won’t get much worse in the near term—this is a bold assumption given poor January survey data—and that the ECB will keep rates low for a long time."

It comes after figures released earlier this month showed that German GDP slowed dramatically in the second half of 2018, flirting with outright recession.

Destatis, the country’s statistics office, reported that its economy grew by just 1.5 per cent last year, down from 2.5 per cent in 2017 and the weakest performance since 2013.

The agency had previously reported that growth was negative, with output down by 0.2 per cent, in the third quarter.

The official estimate for the final quarter of 2018 will not be released until next month, but the full year estimate suggests that it narrowly avoided another three months of contraction, with growth of around 0.1 per cent.

 

The Independent


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