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Italy’s Second-Quarter GDP Declines, Showing Recession

Photographer: Alessia Pierdomenico/Bloomberg

With Italian youth unemployment above 40 percent and sovereign debt of about 2 trillion euros ($2.7 trillion), Prime Minister Matteo Renzi is under pressure to quickly turn around the euro region’s third-biggest economy. Close

With Italian youth unemployment above 40 percent and sovereign debt of about 2 trillion... Read More

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Photographer: Alessia Pierdomenico/Bloomberg

With Italian youth unemployment above 40 percent and sovereign debt of about 2 trillion euros ($2.7 trillion), Prime Minister Matteo Renzi is under pressure to quickly turn around the euro region’s third-biggest economy.

Italy’s economy unexpectedly shrank in the second quarter, falling back into recession and extending a slump that’s lasted most of the past three years.

Gross domestic product fell 0.2 percent from the previous three months, when it declined 0.1 percent, the national statistics institute Istat said in a preliminary report in Rome today. That compares with the median forecast of a 0.1 percent expansion in a Bloomberg survey of 22 economists. Output was down by 0.3 percent from a year earlier.

“A lack of re-stocking and poorer-than-expected exports seem good candidates to explain the surprise,” said Paolo Pizzoli, an economist at ING Bank in Milan. Domestic demand excluding inventories was probably “only mildly up,” he said.

Italy’s GDP has been dropping for the last three years, with the only exception of the last quarter of 2013, when it posted a 0.1 increase.

With Italian youth unemployment at more than 40 percent and sovereign debt of about 2 trillion euros ($2.7 trillion), Prime Minister Matteo Renzi is under pressure to quickly turn around the euro region’s third-biggest economy. Lower than-expected growth may undermine his plans to bring the country’s deficit-to-GDP ratio to 2.6 percent this year and start reducing Europe’s second-biggest debt.

Italy’s 10-year yield was up 4 basis points to 2.79 percent at 1:35 p.m. Rome time, pushing the difference with comparable German Bunds to 168.2 basis points.

Under Pressure

“At best, we expect no growth in 2014, and an expansion of just 1 percent in 2015, partly driven by the recent tax cuts” and European Central Bank credit easing, Daniele Antonucci, senior European economist at Morgan Stanley, said in a note to clients. Both measures are likely to have little effect, he said.

Renzi has acknowledged that annual GDP growth will probably fall well below the Treasury’s 0.8 percent forecast, while the government’s debt reduction plans also seem to be yielding disappointing results, Wolfango Piccoli, managing director at Teneo Intelligence in London, wrote in a research note this week.

Modest Pickup

“Under present conditions, and assuming a more realistic growth rate of 0.3 percent, the cabinet will need to find at least 15 billion euros to 16 billion euros to keep its 2014 deficit reduction plans on course,” he said.

The Bank of Italy last month lowered its growth forecast for this year to 0.2 percent, less than a third of its previous prediction. Even so, industrial production increased 0.9 percent in June, Istat said earlier today. That beat the median economist forecast of 0.8 percent.

While the third quarter should see a modest pickup in personal consumption and gross fixed investment, the Italian economy and banking industry are among the most exposed to Russia’s economic instability, Riccardo Barbieri, the London-based chief European economist at Mizuho International Plc, said in a July 31 research note.

“Even the 0.3 percent increase we have penciled in for the third quarter would be a good result given the current circumstances,” he said.

To contact the reporter on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net

To contact the editors responsible for this story: Jerrold Colten at jcolten@bloomberg.net Ross Larsen, Marco Bertacche

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