Italy's economy slides back into recession

ROME Wed Aug 6, 2014 12:25pm EDT

An employee arranges pricetags at a vegetables work bench during the opening day of upmarket Italian food hall chain Eataly's flagship store in downtown Milan, March 18, 2014.  REUTERS/Alessandro Garofalo

An employee arranges pricetags at a vegetables work bench during the opening day of upmarket Italian food hall chain Eataly's flagship store in downtown Milan, March 18, 2014.

Credit: Reuters/Alessandro Garofalo

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ROME (Reuters) - Italy slid into recession for the third time since 2008 in the second quarter, underlining the chronic weakness of the euro zone's No.3 economy and pressuring Prime Minister Matteo Renzi to complete promised reforms.

Figures on Wednesday from statistics agency ISTAT showed gross domestic product unexpectedly declined by 0.2 percent in April-June from the previous three months. A Reuters poll of economists had forecast growth of 0.2 percent.

The economy also shrank by 0.1 percent in January-March, meaning it has returned to recession, defined as two consecutive quarters of contraction.

Unions and opposition parties said the figures showed Renzi had failed to address the problems of the country, which the leftist SEL party said faced a "real economic disaster".

However, Economy Minister Pier Carlo Padoan rejected suggestions that the government would have to pass an emergency budget to ensure Italy respected European Union deficit rules.

Italy has posted only one quarter of growth since mid-2011, expanding 0.1 percent in late 2013. Adjusted for inflation, second quarter GDP was the lowest for 14 years, ISTAT said.

Italian stocks fell more than 2 percent after the data and the risk premium on Italy's 10-year bonds over those of Germany widened by 12 basis points from Tuesday's close.

Renzi has announced ambitious labor and tax reforms to revive growth needed to curb Italy's 2 trillion euro debt burden but progress has been slow, with his energies taken up for weeks by a draining parliamentary battle over constitutional reform.

His calls for a more expansive interpretation of European Union budget rules have been met skeptically by partners, who fear slackening fiscal discipline will simply push up the debt - already the world's fourth biggest - without growth.

However in a letter to parliamentarians after the data was reported, Renzi said there was no alternative to the reforms. "So we must move forward with greater decisiveness," he said.

European Commission economic policy spokesman Simon O'Connor said the EU had already said Italy should stick to its budget plans.

Italy's official projections see growth of 0.8 percent and a deficit of 2.6 percent of GDP in 2014, but Padoan ruled out any emergency measures to keep the budget deficit within the EU's ceiling of 3 percent of GDP.

"The government is closely watching public finances and with attentive spending controls, there's no need for a supplementary budget," Padoan, a former chief economist at the OECD, told RAI state television.

REFORMS

The Italian GDP reading and data showing German industrial orders fell at their fastest in almost three years in June will reinforce concerns about feeble growth and inflation in the euro zone ahead of a European Central Bank meeting on Thursday.

Germany and France, the bloc's two biggest economies, are due to report second quarter GDP figures next week.

Spain, once at the fore of the euro zone debt crisis alongside Italy, posted second quarter growth of 0.6 percent last week, suggesting their economic fortunes are diverging.

Italy's bond yields have plunged since the ECB pledged at the peak of the crisis to save the euro, but Wednesday's data highlights the lack of progress made in addressing the problems of an economy that has stagnated for more than a decade.

"It has been difficult to distinguish between peripheral Europe for some time, but what we have seen this year is the outperformance of countries that have implemented structural reforms and improved their competitiveness like Spain and Ireland," said Azad Zangana, European Economist for Schroders in London.

"Meanwhile countries that have been slow and unwilling to embrace reforms such as Italy and France, have been a drag on the wider Eurozone economy," he said.

The Bank of Italy said last month that GDP had contracted by 9 percent since the global financial crisis began in 2007.

Beyond an 80-euro-a-month tax break for millions of low-income workers introduced in the second quarter, Renzi has yet to translate promises to revive growth made when he took office in February into action.

Even the impact of the tax break has been questioned after the head of Italy's retail association Confcommercio said the effect on consumer spending had been "almost invisible".

Last month, the Bank of Italy cut its growth forecast to just 0.2 percent for 2014, in line with forecasts from other bodies including the International Monetary Fund and the Organisation for Economic Cooperation and Development.

The data did offer some encouraging signs, however.

ISTAT said industrial output, which in Italy is usually closely correlated with GDP, rose 0.9 percent in June, driven by gains in investment and consumer goods, after posting its steepest drop since 2012 a month before.

(Additional reporting by Roberto Landucci in Rome and Foo Yun Chee in Brussels; Editing by Catherine Evans and Robin Pomeroy)

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