* Economy unexpectedly contracts 0.2 percent in Q2
* Economy Minister rules out emergency budget measures
* PM Renzi says figures confirm reforms must go ahead
* Pressure grows on Renzi to act on economy
(Adds prime minister, economy minister comments)
By Steve Scherer and James Mackenzie
ROME, Aug 6 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 labour 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 sceptically 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
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
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
"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)