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Italy Economy Shrinks for a Fourth Straigh Quarter

Italian Economy Contracts for Fourth Straight Quarter Amid Slump
Italy's economy will shrink 2.4 percent this year, employers lobby Confindustria forecasts. Photographer: Alessia Pierdomenico/Bloomberg

Italy’s economy contracted for a fourth straight quarter in the three months through June as manufacturing slumped and the euro-area debt crisis intensified.

Gross domestic product declined 0.7 percent in the second quarter, Rome-based national statistics institute Istat said in a preliminary report today. The contraction was less than the median forecast for a 0.8 percent decline in a survey of 22 economists by Bloomberg News. GDP fell 2.5 percent from a year earlier, the most since the final quarter of 2009.

Prime Minister Mario Monti’s government is implementing 20 billion euros ($25 billion) in austerity measures that have curtailed consumer spending and prompted Italy’s largest manufacturer, Fiat SpA, to curb investment. Industrial output declined more than forecast in June, Istat said in a separate release today as Monti’s policies contributed to deepening the country’s fourth recession since 2001.

“We believe Italy faces another two quarters of negative GDP growth this year,” said Catherine Colebrook, euro-area inflation economist at BNP Paribas SA, in a research note. The industrial output decline “suggests that Italy’s economy still has some way to go before it moves back into growth territory.”

Manufacturing Slumps

Industrial output dropped 1.4 percent in June from May and 1.8 percent in the second quarter, Istat said. Economists forecast a monthly 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.

Italy, whose surging borrowing costs have moved it to the center of the debt crisis, is not planning to tap the European rescue fund for the moment, Monti said last week. His government is on track to trim its budget deficit to 2 percent of GDP this year, even while forecasting that the euro area’s third-largest economy will contract 1.2 percent. Employers lobby Confindustria forecasts a contraction of twice that pace in 2012.

“I’m afraid that there is a little excess of pessimism in the marketplace,” Marco Valli, chief euro-area economist at UniCredit Global Research, said from Milan in a Bloomberg Television interview. “Because what you can see now is what you would expect from a country that had to raise taxes, cut public expenditure and bear the brunt of financial contagion in Europe.”

Italian 10-year bond yields fell 7 basis points to 5.93 percent at 12:44 p.m. in Rome, after initially rising when the report came out.

Italian business confidence declined last month more than economists forecast as executives are concerned the economic recession will deepen. Turin-based Fiat said last week it is suspending investment in Italy in response to the slump in demand and will focus on temporary layoffs to reduce costs. Car production slumped more than 20 percent in the first half, Istat said today.

Fiat Chief Executive Officer Sergio Marchionne said he will make a decision about restructuring in Europe, including further plant closings, after third-quarter earnings. Any additional layoffs at Fiat, the company’s biggest employer, could further hit Italy’s unemployment rate, already at the highest in almost 13 years.

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