November 30, 2018 / 11:14 AM / in 15 days

Italy close to recession as GDP shrinks for first time in four years

ROME (Reuters) - Italy’s economy contracted in the third quarter for the first time in four years, data showed on Friday, and employers’ lobby Confindustria said the country may already be heading into recession.

People are seen in a Conad grocery shop in Rome, Italy, April 10, 2016. REUTERS/Max Rossi

The grim figures came as the government negotiates with the European Commission which has rejected its big-spending 2019 budget, saying Italy should focus on cutting the deficit rather than fiscal expansion.

Gross domestic product (GDP) in the euro zone’s third largest economy fell by 0.1 percent in July-September due to weaker domestic demand, statistics bureau ISTAT said, the first decline since the second quarter of 2014.

On a year-on-year basis, GDP rose 0.7 percent. Both figures were revised down from ISTAT’s preliminary estimate last month which pointed to a flat reading quarter-on-quarter and a 0.8 percent annual increase.

“It’s a worrying figure that could lead us to technical recession in the last quarter of the year,” said Andrea Montanino, Confindustria’s chief economist of employers.

Recession is defined by economists as two consecutive quarters of falling GDP.

“We are forecasting a flat fourth quarter with downside risks due to falling confidence indices,” Montanino said.

The opposition blamed the data on the government that took office in June, made up of the anti-establishment 5-Star Movement and the right-wing League.

Deputy Prime Minister Matteo Salvini said his government’s center-left predecessors were responsible. “In 2019, with our budget based on more jobs and lower taxes, Italy will return to growth,” said Salvini, who is the League’s leader.

WEAK DEMAND

The economy has been slowing steadily for the last 18 months. Second quarter growth was unrevised at 0.2 percent on the quarter and 1.2 percent year-on-year.

The government says its expansionary budget, which targets the deficit to rise to 2.4 percent of GDP in 2019 from 1.8 percent this year, is needed to prevent the chronically sluggish economy slipping into another recession.

The European Commission says it breaks the promises of the previous administration and is calling for lower spending from highly-indebted Italy.

Negotiations between the government and the Commission are continuing but the two sides still seem far apart.

In the third quarter, the economy was held back by weak domestic demand, with consumer spending falling 0.1 percent from the previous quarter and investments down by 1.1 percent.

Domestic demand subtracted 0.3 percent from growth, while trade flows contributed positively by a marginal 0.1 percent.

Last month the government cut its full-year 2018 GDP growth forecast to 1.2 percent from a 1.5 percent projection made in April by the previous government. Achieving even the revised target would need a strong acceleration at the end of the year.

Separate data on Friday showed the jobless rate rose in October to 10.6 percent from 10.3 percent the month before.

However, employment levels remained stable and more permanent jobs were created instead of temporary ones, which the government has made a major aim of its labor policies.

Reporting by Gavin Jones; editing by David Stamp

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