February 13, 2012 / 6:52 PM / 6 years ago

Italy seen in recession as GDP contraction deepens in Q4

ROME (Reuters) - Italy's economic slump is expected to have deepened in the fourth quarter of 2011, tipping the euro zone's third-largest economy into a recession that is expected to last well into this year.

Gross domestic product probably shrank 0.5 percent in the fourth quarter from the previous three months, according to the median forecast of a Reuters poll of 34 economists.

That would mark a deterioration from a 0.2 percent decline in GDP in the third quarter, and herald a recession, which is officially defined as two consecutive quarters of falling economic output.

Weak consumer demand, investments and exports and a 2.1 percent slump in industrial output over the fourth quarter all point to an accelerated decline in economic activity as Italy suffered the effects of the euro zone debt crisis, which has weakened confidence, and as global demand slowed.

Italy's national statistics office ISTAT is set to release a preliminary estimate for fourth-quarter GDP at 0900 GMT on Wednesday.

Analysts said they expected the recession to continue at the start of 2012, though possibly at a slower pace following a robust monthly rise in industrial production in December.

"There are real factors arising from the government's fiscal tightening and from the financial crisis ... that will keep Italy in recession in the first two quarters of 2012 ahead of a gradual recovery in the second half," said Paolo Mameli from Intesa Sanpaolo.

Mario Monti's government passed an austerity plan in December which includes tax hikes, public spending cuts and pension reform, that is set to weigh on growth in the short-term.

The Bank of Italy said last week the economy would shrink by around 1.2 percent this year if a recent fall in state borrowing costs is maintained, while the fall would be even steeper if bond yields rise again.

Italian bond yields surged last year as financial markets became worried that the country's high debt could make it the next euro zone candidate to seek an international bailout.

While markets are still concerned about euro zone debt, Italian borrowing costs have come down from a peak in November, helped by the European Central Bank's offer of cheap funds to banks, which has reduced the risk of a credit crunch.

Reporting By Giulio Piovaccari, writing by Catherine Hornby; Editing by Susan Fenton

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