Italian GDP Contracts, Signaling New Recession

By Chiara Vasarri and Lorenzo Totaro - Dec 21, 2011 6:09 PM GMT+0700

The Italian economy contracted in the third quarter, signaling the country may have entered its fifth recession since 2001 as the government adopts new austerity measures that will further weigh on growth.

Gross domestic product declined 0.2 percent from the second quarter, when it expanded 0.3 percent, national statistics institute Istat said in Rome today. It was the first contraction since the final three months of 2009 and matched the median forecast in a survey of 23 economists by Bloomberg News.

Consumer spending declined 0.2 percent from the second quarter, with investment contracting 0.6 percent. Exports grew 1.6 percent in the quarter, while imports fell 1.1 percent.

Prime Minister Mario Monti’s government faces a final vote as soon as tomorrow on its 30 billion-euro ($39 billion) emergency budget plan that aims to shield Italy from the region’s debt crisis and bring down record borrowing costs. The measures, which seek to balance the budget in 2013, mark the third austerity package this year and the spending cuts and tax increases likely deepened the contraction in the final quarter.

“Italy technically entered a recession as we expect an even more marked contraction in the fourth quarter of minus 0.6 percent,” said Chiara Corsa, Milan-based economist at UniCredit SpA. “Looking at today’s data, they show that the main drag came from domestic demand, both consumptions and investments.”

Weak Data

Household spending declined 0.2 percent from the second quarter, while imports fell 1.1 percent. Investments slipped 0.6 percent.

Confindustria, the nation’s employers lobby, forecast last week that GDP, which has trailed the euro-region average for more than a decade, will contract 1.6 percent next year. The group predicted that the euro area’s third-largest economy will shrink every quarter until the second half. A contraction in the final three months of this year would mark the second quarterly contraction, the technical definition of a recession.

“We are already in a recession, look at the numbers, we are in recession,” Development Minister Corrado Passera said on Dec. 15 when Confindustria presented its report. The economy is “worse” than the government expected when it came to power a month ago, he said.

Recent data offer evidence of the country’s economic decline. Industrial orders dropped 1.6 percent in October from the previous month while industrial production fell 0.9 percent over the same period, a Dec. 20 report showed. Unemployment jumped to a 17-month high of 8.5 percent in October, with youth unemployment topping 29 percent.

Plant Closing

Fiat SpA (F), the country’s biggest manufacturer, closed its Termini Imerese plant in Sicily last month as part of a plan to reduce costs and improve productivity at its Italian facilities as sales of its cars in Italy slump. Fiat agreed with unions to pay 21 million euros to support early retirement for 640 of the workers.

Monti, who took office a month ago as head of an unelected government of non-politicians, is seeking to show investors he can tame a 1.9 trillion-euro debt, bigger than that of Spain, Greece, Portugal and Ireland combined. Concern about Italy’s ability to finance its borrowing is sapping demand for Italian bonds and forcing the country to offer record returns to attract investors. The Treasury paid 6.47 percent at a sale of five-year debt on Dec. 14, the highest since 1997 and almost three times what Germany last paid to borrow for 10 years.

U.K. Deficit

Elsewhere in Europe, Britain’s budget deficit narrowed more than economists forecast in November as tax revenue eased and the government’s fiscal squeeze restrained spending. Net borrowing excluding support for banks fell to 18.1 billion pounds ($28.5 billion) from 20.4 billion pounds a year earlier.

Bank of England policy makers said the pace of their bond purchases is close to the market’s capacity as some signaled further stimulus might be needed next year to weather Europe’s sovereign debt crisis, according to the minutes of their Dec. 7- 8 meeting released today.

In Asia, Japan’s exports fell and the central bank lowered its assessment of the economy for a second straight month. Shipments dropped a more-than-expected 4.5 percent in November from a year earlier, a Ministry of Finance report showed today.

In the U.S., the National Association of Realtors releases revised existing home sale data and the Mortgage Bankers Association publishes a report on weekly mortgage applications.

With European governments struggling to find a lasting solution to a debt crisis that has increased sovereign borrowing costs and pushed economies from Italy to Greece and Portugal into recession, the European Central Bank has introduced a menu of measures designed to avert a credit crunch.

ECB Lending

The ECB said today it will lend euro-area banks more than economists forecast for three years in its latest attempt to keep credit flowing to the economy during the crisis. The Frankfurt-based ECB awarded 489 billion euros in 1,134-day loans, more than economists’ median estimate of 293 billion euros in a Bloomberg News survey.

With concern about Italy’s solvency on the rise, the country’s lenders are becoming increasingly dependent on the ECB to find funding. UniCredit SpA and Intesa Sanpaolo SpA are among Italian banks that will use bonds guaranteed by Italy as collateral for loans from the ECB, two people with knowledge of the matter said yesterday.

The plan, which is part of Monti’s budget package, allows the Treasury to offer guarantees for bonds issued by banks in order to give them access to ECB liquidity.

To contact the reporters on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net; Lorenzo Totaro in Rome at ltotaro@bloomberg.net.

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net