Italian contraction

Italian economy contracts 0.7% in second quarter

Italy's economy shrank 0.7% in the second quarter, underlining a deepening recession, as government austerity measures continue to affect everything from factory activity to consumer spending.

BBC,

7 August, 2012

Italy's GDP fell for the fourth quarter in a row, preliminary figures showed.

Compared with a year earlier, growth slumped by 2.5%, Istat said.

GDP fell by 0.8% in the first quarter compared with the final three months of 2011, the statistical agency said.

Earlier, data showed that factory output in June slumped 1.4% compared to May and 8.2% year on year.

"The austerity measures are obviously weighing on the economy," said Vincenzo Bova of MPS Capital Services. "Investments and consumption, both private and public, are the hardest-hit areas," he added.

Prime Minister Mario Monti's government is implementing a series of austerity measures worth 20bn euros (£15.8bn) as it grapples with rising borrowing costs, driven by market fears over the widening eurozone sovereign debt crisis.

But investors are worried Italy - the eurozone's third biggest economy - may be next in line to suffer the same ordeals that have hit Greece, Portugal and now Spain.

'No sign of change' from recession

Italy's government has the biggest debt burden of any of the major eurozone countries at 123% of GDP, which makes it particularly susceptible to a loss of market confidence - something that would make it impossible for the government to roll over its debts as they come due for payment.

Despite the austerity measures investors have continued to dump Italian sovereign bonds, which have pushed their yields close to unsustainable levels as markets fear a breakdown of the euro.

Italian business confidence fell last month, as company executives are increasingly pessimistic over the country's economic prospects and expect the recession to worsen in coming months.

Employers' lobby group Confindustria predicts that the economy will shrink 2.4% this year, with unemployment hovering around 11%. The government's forecasts the economy to contract by 1.2%.

"There is no sign of any change of trend for Italy," said Annamaria Grimaldi, an analyst at Intesa Sanpaolo.

Mr Monti has been trying to persuade other European leaders to give Italy some breathing space to allow its economy to grow, rather than sticking to tight fiscal targets that have contributed to the recession's deepening.

In an interview with Der Spiegel at the weekend, Mr Monti said: "If everything goes according to plan, I will remain in office until April 2013, and I hope that I can rescue Italy from financial ruin by then - and this with moral support from a few European friends, led by Germany. But I will also say very clearly: moral support, not financial."

Germany and other countries "should allow a bit more leeway to those states in the euro zone that follow European guidelines the most closely", he added.

But Mr Monti has struggled to rebuild public confidence in his leadership back home, where his popularity has plunged from record levels since he took office last year. In fact, there is mounting speculation that his predecessor Silvio Berlusconi may be making a comeback.

Italy Industrial Production Plunges 8.2% YoY, GDP Declines 2.5% Annualized; Italy to Pay Civil Servants 80% of Their Salary to Do Nothing

Mish's Global Economic Analysis,

7 August, 2012

News in the eurozone's third largest economy is once again on the dismal side. Italian Industrial Production Plunged more than expected as did GDP. 

 Italian industrial production declined more than forecast in June, signaling the euro region’s third-biggest economy probably contracted for a fourth quarter. Economists forecast a decline of 1 percent, according to the median of 16 estimates in a Bloomberg News survey. Production fell 8.2 percent from a year ago on a workday-adjusted basis.

Italian business confidence declined last month more than economists forecast as executives became more concerned that the country’s economic recession will deepen in coming months.

Fiat SpA (F) temporarily stopped new investments in Italy as the European debt crisis caused sales in the region to plunge. Italian car sales have plummeted 20 percent through July, with deliveries this year on track to slip to the lowest level since 1979.

Italy to Pay Civil Servants 80% of Their Salary to Do Nothing

To plug the rising deficit gap, Prime Minister Mario Monti approved Deep Cuts in National Spending (a needed measure but not how they went about it), and also hike the VAT by 2% (economic insanity in a deepening recession). 

 Italy's government has agreed to cut spending by 26bn euros (£21bn, $32bn) over the next three years to plug the gap between spending and income. 

Staffing levels will be assessed by October. Some workers will be sent home for two years on 80% of their salary before losing their jobs or being retired.

The package means the country will not now need to bring in an unpopular increase of 2% in value added tax (VAT) and will be able to funnel 2bn euros to the Emilia Romagna region, which was hit by two earthquakes in May.

The cost of servicing Italy's debt increased by 16% to 18.7bn euros, up from 16.2bn euros in the first quarter of 2011.

Italy Recession Lingers for Year

The official estimate for decline in GDP this year was -1.2% (revised lower from about half that). Prepare for another downward revision as Italy's Recession Pain Deepens. 

 Italy shrank further into recession in the second quarter for a 2.5 percent yearly decline, data showed on Tuesday, threatening attempts by Mario Monti's technocrat government to control a debt crisis that is undermining the whole euro zone.

A 0.7 percent fall in gross domestic product, only slightly better than the first quarter's 0.8 percent decline, means the Group of Seven economy has now been contracting for at least a year, according to figures from government agency ISTAT.

This will weaken tax revenues and hit jobs and consumer spending, a vicious circle which makes it harder for Monti, who is aiming to cut the budget deficit to 0.1 percent of GDP in 2014, to meet his public finance goals.

A Reuters survey of analysts last month forecast that the budget deficit this year would be 2.3 percent of GDP, compared with Monti's 1.7 percent target, and 1.3 percent in 2013, when the government forecasts a 0.5 percent shortfall.

ISTAT gave no numerical breakdown of GDP components with its preliminary estimate, saying only that activity contracted in agriculture, industry and services.

ISTAT said so-called "acquired growth" at the end of the first quarter stood at -1.9 percent.

This means that if GDP posts flat quarterly readings in the final two quarters of 2012, over the whole year it will be down 1.9 percent from the previous year.

Expect Debt-to-GDP to Rise

 

Italy's debt-to-GDP ratio is 123%. Given rising borrowing costs and shrinking GDP, that number is going to go up, perhaps substantially.

Eurosceptic Government in 2013

 

What Italy needs is work rule reform, pension reform, a dramatically smaller government, and lower taxes. As with Spain, work rule and pension reform is very slow in coming but tax hikes have been plentiful, exactly the wrong approach.

A eurosceptic government may be on the way next year as Mario Monti will step down in April.