Italian Economy Contracts as French Confidence Stalls: Economy

Italy’s economy shrank more than initially reported in the first quarter and French industrial confidence stalled in May, as the euro area struggled to emerge from a record-long recession.

Italian gross domestic product fell 0.6 percent from the previous three months, the Rome-based National Statistics Institute, said today, after a May 15 estimate of a 0.5 percent drop. A French index of sentiment among factory managers was unchanged at 94, while an index of service companies fell to 88 from 89, according to the Bank of France.

“We don’t expect recovery this year in Italy or at the European level,” said Silvio Peruzzo, an economist at Nomura Holdings Inc. in London. “It’s no longer a periphery versus core issue, now that we see core countries like France struggling too, while Germany goes on its own path.”

The euro-area economy contracted 0.2 percent in the first three months of the year, extending its recession into a sixth quarter, and is forecast to stagnate in the second quarter before returning to growth. The slump has increased pressure on the currency bloc’s leaders and the European Central Bank to find ways to spur growth.

The gloomy European economic data followed yesterday’s report that China’s industrial production rose a less-than-forecast 9.2 percent in May from a year earlier and factory-gate prices fell for a 15th month, according to the National Bureau of Statistics in Beijing. Export gains were at a 10-month low and imports dropped.

Chinese Growth

The data add pressure on President Xi Jinping and Premier Li Keqiang to shore up growth less than three months into their tenure, after first-quarter expansion unexpectedly slowed. While the figures boost the case for easing monetary policy or approving more spending, the government’s room is limited by rising home prices, financial risks and overcapacity.

In Italy, the euro zone’s third-largest economy, former Italian Prime Minister Mario Monti’s austerity measures helped bring the country’s deficit within the European Union’s limit, while deepening the recession. Exports dropped 1.9 percent in the first three months, the first quarterly fall since the second quarter of 2009, today’s report showed. Industrial output unexpectedly declined in April.

Monti’s successor, Enrico Letta, has pushed for a more expansive policy and suspended the payment of a property tax due this month as well as signaling he may cut levies on labor in an effort to create new jobs.

Tax Increases

“The recession is deeply undercutting potential output and threatens to erode social cohesion,” Bank of Italy Governor Ignazio Visco said May 31. Italy’s economy will contract 1.8 percent this year before expanding 0.4 percent in 2014, the Organization for Economic Development said May 29.

Today’s French industrial confidence report came as President Francois Hollande’s tax increases weighed on domestic demand in an economy that has barely grown in two years.

Hollande is struggling to balance demands of reviving growth and trimming the budget deficit. Yet with more than 20 billion euros ($26 billion) of tax increases now feeding through to companies and households in France, domestic demand is unlikely to fuel any recovery in the months ahead, economists say.

“The problem is that the tax increases are now starting to be felt in full,” said Bruno Cavalier, an economist at Oddo & Cie in Paris. “In the short term I see no improvement in the overall situation.”

‘Slight Decline’

French factory order books are judged “insufficiently full,” while domestic orders are in “slight decline,” the central bank said. Prices of finished products “continue their slight decline,” it added.

The figures suggest GDP in Europe’s second-largest economy will rise 0.1 percent in the second quarter, the Bank of France said. That’s in line with the economy’s performance since the first quarter of 2011, which is the last time gross domestic product expanded by more than 0.2 percent in a quarter.

The International Monetary Fund said last week that it expects French GDP to shrink 0.2 percent in all of 2013 after stagnating in 2012. The Washington-based fund said that tax increases have put France on track to meet its deficit targets, though further efforts should focus on spending cuts.

Industrial production is starting to recover as France benefits from improved international demand. Output increased 2.2 percent in April after declining 0.6 percent in March, national statistics office Insee said today. Production was 0.5 percent below its year-earlier level.

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