Italian Consumer Spending and Exports Fall as Recession Looms

By Flavia Krause-Jackson and Steve Scherer

Sept. 10 (Bloomberg) -- Italian consumer spending and exports, which account for almost 90 percent of Europe's fourth- biggest economy, declined in the second quarter, pushing the country closer to a recession.

Household spending fell 0.3 percent and sales of Italian goods overseas dropped 0.7 percent from the previous three months, Istat, the Rome-based statistics office, said today in its final report on gross domestic product. The economy shrank 0.3 percent in the quarter, matching Istat's initial report, leaving Italy on the brink of a fourth recession in a decade.

Italian families, saddled with higher mortgage payments and energy bills, have cut back on spending, while businesses have struggled to stay competitive as the stronger euro and rising production costs hurt earnings. The European Central Bank raised its key interest rate to a seven-year high of 4.25 percent in July to combat inflation, showing little inclination to cut borrowing costs even as growth slows.

`` We expect a technical recession by the end of 2008,'' said Lavinia Santovetti, an economist at Lehman Brothers Holdings Inc. in London. ``Consumers probably cut spending as suggested by poor growth in retail sales and new car registrations.''

Forecasts Cut

The outlook in the rest of Europe is also becoming gloomier. The European Union today is set to cut its economic- growth forecasts, EU Commissioner Joaquin Almunia said yesterday. The ECB last week lowered its prediction for 2008 growth in the euro region to 1.4 percent from 1.8 percent and cut next year's forecast to 1.2 percent from 1.5 percent.

Italian year-on-year GDP shrank a revised 0.1 percent in the second quarter, the first time growth has contracted on a yearly basis since the third quarter of 2003, an Istat spokesman said. The fall in exports outpaced rising imports, shaving 0.3 of a percentage point from quarterly growth, while inventories added 0.2 of a percentage point, Istat said.

Italy is set to be the slowest-growing economy in the region this year and has lagged behind the EU average for more than a decade. The economy is growing at a fraction of the rate of its biggest trading partners, France and Germany, which will expand 1.7 percent and 1.6 percent respectively, the EU predicted in April.

The slowing growth is weighing on sales of the country's biggest manufacturers. Fiat SpA, Italy's biggest carmaker, posted a 23 percent drop in car sales in Italy last month. Indesit SpA, Europe's third-largest home appliance maker, said on July 30 that full-year earnings before interest and taxes may be 10 percent to 20 percent less than in 2007.

Consumer Confidence

Italian household optimism is hovering near a 15-year low and retail sales declined in August for an 18th month. Consumers' purchasing power has been eroded by the rising inflation rate, which reached a six-year high in August buoyed by the jump in oil prices and a surge in the cost of staple foods such as pasta and bread.

Consumers and manufacturers may be getting some relief. Crude oil prices have dropped 28 percent since a July 11 record. The euro has also dropped 8 percent against the dollar in the past six months, which may help lift exports.

Prime Minister Silvio Berlusconi, who took office in May, moved to boost consumer confidence and spending by abolishing the country's main property tax and offering to freeze mortgage payments for homeowners at risk of default. His government will also tax more of oil company profit, a measure dubbed the ``Robin Hood'' tax, and use the proceeds to increase welfare spending.

To contact the reporter on this story: Flavia Krause-Jackson in Rome at fjackson@bloomberg.net