Italy Falls Into a Recession, Spain Shrinks, France Grows 0.1%

By Lorenzo Totaro

Nov. 14 (Bloomberg) -- Italy, the third-biggest economy in the euro region, slipped into a recession in the third quarter as the fallout from the yearlong credit crisis choked growth.

The Italian economy fell into the fourth recession in less than a decade with gross domestic product shrinking 0.5 percent from the second quarter, when it contracted 0.4 percent, Istat, the Rome-based statistics office, said today.

Italy follows Germany, Europe's largest economy, in posting two consecutive quarters of contraction -- the technical definition of a recession. While France unexpectedly reported 0.1 percent growth for the latest quarter, Europe's economy as a whole probably has fallen into its first recession since 1993, which could lead to further cuts in interest rates and taxes amid the worst financial crisis since the Great Depression.

``Italy will be in recession up to the third quarter of next year,'' said Dominic Bryant, economist for the euro zone for BNP Paribas in London. ``Hopefully lower interest rates will help revive the economy, but it will take time to see the effects.''

The European Central Bank last week cut its benchmark rate by a half-point to 3.25 percent, the second such reduction within a month. Having raised rates as recently as July to combat inflation, policy makers are now signaling that slumping growth may lead to further cuts.

The Spanish economy contracted 0.2 percent in the third quarter, a separate report showed today. Germany's economy shrank a bigger-than-expected 0.5 percent, pushing the nation into the worst recession in at least 12 years, a data showed yesterday.

Euro-Area Economy

The French economy, the euro region's second-largest, unexpectedly grew 0.1 percent in the third quarter, avoiding a recession, the government said today. The euro-area economy probably shrank 0.2 percent in the three months through September, according to the median forecast of 39 economists surveyed by Bloomberg. That report will be released at 11 a.m.

The financial crisis has prompted European governments to pump about $1.7 trillion into the banking system to try to restart lending and investment and stem a rout in the stock market. The economy has suffered other shocks as well, including the euro's rise to a record $1.60 in mid-summer, the strongest inflation in almost 16 years and oil's jump to an unprecedented $147 a barrel in July.

Italy's business confidence dropped to the lowest in almost 15 years in October as the credit crisis deepened. Italy's benchmark S&P/MIB index has plunged 47 percent this year.

Taking Its Toll

The recession is already taking its toll on Italian companies ranging from automakers to microchip producers. STMicroelectronics NV, Europe's largest chipmaker, forecast a drop in fourth-quarter revenue of as much as 8 percent.

Fiat SpA, Italy's largest automaker, said on Oct. 23 earnings may fall as much as 85 percent next year in a ``worst- case'' scenario. The company, which has already scaled back car production in Italy, said yesterday that it planned temporary layoffs of 3,000 workers in Brazil to cut output by 20 percent.

``We don't expect a quick or simple economic recovery anytime soon; we may have to wait until the second half of 2009 or even until 2010,'' Aldo Soldi, president of Coop, Italy's largest supermarket chain, said in a Nov. 12 interview. ``Shoppers tend more and more to buy fewer and cheaper products. As retailers, we will have to monitor this phenomenon carefully.''

Italy's economy will stagnate this year and next, making it the worst-performer after Ireland among the nations sharing the euro, the European Commission forecast on Nov. 3.

The Italian statistics office didn't provide a breakdown of the GDP figures. Istat will release its final report on Dec. 12.

To contact the reporter on this story: Lorenzo Totaro at in London or ltotaro@bloomberg.net.