Italy GDP posts modest pickup, seen slowing again

ROME Fri Aug 5, 2011 7:05am EDT

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ROME (Reuters) - Italy's economy posted a modest acceleration in its chronically low growth in the second quarter, while a slump in output in June added to signs the upturn is already over and activity will slow in the second half.

Stronger growth is a key element to Italy's efforts to reduce its budget deficit and the high public borrowing that have put it in the firing line of Europe's debt crisis.

Gross domestic product still rose just 0.3 percent between April and June, in line with expectations after 0.1 percent increases in each of the previous two quarters, preliminary data showed on Friday.

"I doubt that markets will consider today's GDP data as any reason to change their negative sentiment on Italy," said Citigroup analyst Giada Giani.

"There will certainly be a slowdown in the second half on the basis of purchasing managers indexes that have weakened sharply and other weak leading indicators."

The data matched the median forecast in a Reuters survey of analysts. Forecasts spanned -0.1 percent to +0.5 percent.

Italian government bonds and shares have been pounded by markets in recent weeks, embroiling the euro zone's third largest economy in the region's debt crisis.

Markets have focused on Italy's political instability and dismal growth prospects, sending its 10-year sovereign bond yields above 6 percent, a level regarded as unsustainable.

Gross domestic product was up 0.8 percent year-on-year, also in line with forecasts and slowing from +1.0 percent in the first quarter.

"The export-led recovery this year probably peaked in the second quarter," said Raj Badiani of IHS Global Insight. "I would expect growth to either disappear in the third quarter or the economy to contract slightly."

OUTPUT SLUMP

Italy has been one of the most sluggish economies in the world for at least a decade, a record that looks set to continue despite the modest GDP pick-up between April and June.

Earlier on Friday data showed industrial output fell 0.6 percent in June, confounding expectations of a rise, after an identical sized decline in May.

Purchasing managers' indexes for the last two months have pointed to an economy in stagnation at best, and business confidence in July fell for the fourth month running to its lowest level for a year.

The yield differential between Italian 10-year bonds and their safer German equivalents narrowed on Friday amid rumors the European Central Bank was buying Italian bonds, but a trader at a large Italian bank said the situation remained "alarming."

The Milan bourse also recovered after falling more than 5 percent on Thursday and was up 1.1 percent at 1030 GMT.

Analysts say the downwardly revised 1.1 percent full-year growth forecast of Silvio Berlusconi's beleaguered government already looks at risk, leaving Italy in its customary position as one of the most sluggish economies in the world.

Berlusconi this week opened talks with trade unions and employers over a reform agenda to help growth, promising a platform of measures by the end of September.

However, many analysts remain sceptical it will produce significant results, given chronic divisions in the ruling coalition that have been vividly highlighted by recent tensions between Berlusconi and Economy Minister Giulio Tremonti.

"The markets have pretty much discounted anything that Berlusconi has said and are probably more concerned about his relationship with Tremonti," said IHS Global Insight's Badiani.

"What markets are really looking at now is the political mechanism in Italy and whether it is strong enough to deliver this reform agenda and on the promised austerity measures. Anything that undermines that fiscal collective voice will be seen as a bad development and Italy will get hammered again."

ISTAT gave no numerical breakdown of GDP components with its preliminary estimate, saying only that activity in industry and services both expanded, while agriculture contracted.

-- additional reporting by Michael Rose and Gabriella Bruschi in Milan

(Editing by Patrick Graham, Ron Askew)

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