Italian GDP shrank again in Q2 – now officially in recession

The Italian GDP shrank again in the second quarter, after contracting in the first. Economists had forecast marginal growth. A country is said to be in recession when it goes through two consecutive quarters of contraction.

In Q2 2014, Italy’s GDP (gross domestic product) contracted by 0.2% after shrinking by 0.1% in the first quarter, according to the Istituto Nazionale di Statistica (ISTAT).

All three main sectors of the economy – services, agriculture and manufacturing – posted a contraction.

This is the third economic recession Italy has entered since the global financial crisis of 2008.

Among the advanced economies, Italy is the only one that has not yet recouped its pre-recession GDP size. Italian GDP is still 9.1% smaller than it was at its pre-crisis peak.

One hopeful quarter in 2.5 years

The Italian economy shrank from 2008 to 2009, and then again from 2011 to 2013 – the five-year period will go down in history as the country’s worst economic slump since the Second World War.

In the last quarter of 2013, Italy showed signs of perhaps entering a period of economic recovery, but this soon changed as indicators throughout this year progressively deteriorated.

Since the middle of 2011, the country has only seen one quarter of slight growth, all the others posted declines.

In an interview with the BBC, Hetal Mehta, a European economist at Legal & General Investment Management, said “Italy has a huge pile of government debt and they need growth to bring that debt stock down, so having such weak growth figures is a major setback.”

Italy GDP changes per quarter

Q4 2013 was the only one to register growth in the last 12 quarters. (Data source: ISTAT)

Prime Minister’s dilemma

Prime Minister Matteo Renzi came to power in February this year promising to revive the economy and introduce reforms. So far, the only reform he has managed to put through has been an €80-per-month tax break for low-income employees.

He will find it extremely difficult to stimulate the economy, given that the country has a massive debt and European Union regulations will not allow him to increase the current budget deficit.

Disappointing growth figures will undermine Mr. Renzi’s plans to bring Italy’s deficit-to-GDP ratio to 2.6% in 2014 and start reducing its €2 trillion ($2.7 trillion) debt, the largest debt in Europe.

Economy Minister Pier Carlo Padoan rejected the idea of having to pass an emergency budget to make sure Italy complied with EU deficit regulations.

Industrial production up

On a positive note, ISTAT published Italy’s June industrial Production Index, which registered a seasonally adjusted increase of 0.9% compared to May.

However, over the three-month period ending on June 30, industrial production fell -0.4% compared to the previous quarter.

June’s industrial production was 0.4% up on June 2013, while the figure for the first half of this year showed a +0.2% increase compared to H1 2013.

With Germany’s statistical agency reporting a -3.2% slump in factory orders, there is growing concern about the state of the economies in the whole of the Eurozone and what the impact the recently expanded Russian sanctions might have.