Italian business morale falls as austerity hits

ROME, April 26 Thu Apr 26, 2012 7:33am EDT

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ROME, April 26 (Reuters) - Italian business confidence fell unexpectedly to its lowest level in two and a half years on Thursday as austerity measures at home and in the euro zone weighed on consumer spending.

After rising slightly in March, business morale for April in the euro zone's third-biggest economy fell to a seasonally adjusted 89.5, the lowest since October 2009, statistics office ISTAT said.

A Reuters survey of analysts had forecast the index would be flat at last month's original reading of 92.1. ISTAT said March's reading was revised down to 91.1.

Falling business morale is an ill omen for the second quarter. The index closely tracks Italian growth and is evidence of the depressive effects of the Europe-wide push for fiscal austerity as a remedy for the euro zone debt crisis.

"Italian austerity is hurting domestic demand, and austerity in the rest of Europe is hurting exports," said Paolo Pizzoli, senior economist at ING Financial Markets in Milan.

Last year, 57 percent of Italian exports were to European Union partners, Pizzoli said.

In November, Prime Minister Mario Monti took charge of an unelected government of technocrats after Silvio Berlusconi stepped down amid a sex scandal and a spiralling debt crisis that had already forced Greece, Ireland and Portugal to seek bailouts and impose austerity.

Monti immediately passed a tough belt-tightening package that included a major pension overhaul and 24 billion euros in tax increases for this year alone.

The phasing in of Monti's new taxes combined with the pangs of the recession are hurting the premier's popularity. His ratings fell four percentage points to 51 percent in April, from a high of 62 percent in January, an IPR Marketing poll showed on Thursday.

Confidence in the government fell 5 percentage points to 45 percent, down from a high of 55 percent in January, the poll showed.

The Italian manufacturers surveyed by ISTAT during the first half of the month indicated that their orders, both foreign and domestic, remained low, and their expectations for production in the next three months fell.

Italy won't pull out of recession until the second quarter of next year, according to a Reuters poll of analysts published last week.

EUROPEAN SHIFT

Bond yields for peripheral euro zone countries including Italy again are rising even though 25 EU leaders signed a stringent "fiscal pact", or budget discipline treaty, in March, and as elections in France and Greece loom.

Monti on Thursday backed a call to reorientate the EU's sick economy towards growth, saying that concentrating on budgetary discipline alone could leave the continent in a prolonged slump. At a European level, the focus is turning to growth from austerity, Pizzoli said.

"The deteriorating economic cycle increases pressure to shift the focus to growth, and it looks like this is a view that is increasingly shared at a European level," the ING economist added.

European Central Bank President Mario Draghi on Wednesday said the region should follow its fiscal treaty with a "growth compact", and Socialist Francois Hollande, favourite to take the French presidency next month, has called for the ECB's mandate to be revised to add a responsibility for promoting growth.

Italy's Monti, an economist and two-time European commissioner, has embraced the new focus on growth.

"Europe needs policies that raise potential growth rates," Monti said at a business conference in Brussels on Thursday.

"Italy was the first country to highlight the need to put growth on the European agenda," he said.

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