Italy suffers shock return to recession as Spain improves

Italy has suffered a shock slip back into recession as the eurozone’s third largest economy struggles to maintain momentum in its growth.

Official figures yesterday showed that Italy’s GDP contracted by 0.2% in the second quarter of the year, following a 0.1 per cent fall in the first three months of the year.

Analysts had predicted that Italian GDP would start growing again but it slipped to its third recession since the onset of the global financial crisis.

The bad news instantly hit the value of Italian shares, with the FTSE MIB Index shedding 2.5%.

Italy’s lapse contrasts sharply with the performance of Spain, the other major European economy that was at the heart of the single currency sovereign debt crisis in 2011/12. Spain has grown for four successive quarters and posted a GDP expansion of 0.6% in the three months to June.

Italy is also easily the worst performer among the G7 economies, lagging far behind the rest of the group in recovering from the global financial crisis.

Analysts said yesterday that Italy’s outstandingly weak growth performance was a consequence of its failure to overhaul its labour and product markets, which were holding back productivity growth.

“While Italy has taken some steps to improve the economy the pace of new reforms is quite simply too slow and too unambitious,” said Mads Koefoed of Saxo Bank.

“The largest chunk of the difficulties is homemade,” agreed Christian Schulz of Berenberg Bank. “The new reform-minded Prime Minister [Matteo] Renzi has boosted confidence but he has struggled to implement game-changing labour market reforms yet. That remains the key difference to Spain and Portugal.”

However, some analysts pointed out that low inflation and the failure of the European Central Bank to loosen monetary policy were not helping. “Overall euro area growth is modest and inflation is close to zero. Such a path implies that Italy, as a persistent growth underperformer, is likely to be in or near recession,” said Giada Giani of Citigroup.

Continued recession or stagnation is likely to throw the spotlight on Italy’s sovereign debt pile, which is equivalent to more than 130% of GDP.

“If the ECB does enact QE [quantitative easing] then fears about Italian debt sustainability may well prove to be the trigger,” said Fathom Consulting.