Eurozone growth falls to four-year low as Italy's economy tips into recession

Italy's GDP fell by 0.2% in the last quarter, official figures show
Eurozone economy has all but ground to halt, with Germany and France also floundering

By ADRIAN LOWERY FOR THISISMONEY.CO.UK and REUTERS

Updated: 10:27 EST, 31 January 2019

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The stagnant eurozone economy suffered another setback today with the news that the Italian economy had tipped into recession.

The EU's third-largest economy shrank more than expected in the last quarter of 2018 and recession has been signalled as that followed a contraction in the previous quarter.

The data came alongside figures that showed the eurozone as a whole grew at its lowest pace in four years in the final three months of 2018. Gross domestic product in the 19 countries sharing the single currency rose by 0.2 per cent in the quarter and by 1.2 per cent year-on-year, according to European statistics agency Eurostat.

In what will be seen as a setback for the new anti-establishment government, as well as for European Union authorities, Italy's official statistics bureau ISTAT reported that gross domestic product fell by a quarterly 0.2 per cent between October and December.

A person stares at a still life street-art installation by Italian street artist Maupal, showing the shredded European flag uncovering the Italian flag reading 'Bank-si' ('si' meaning 'yes' in Italian).

GDP had already shrank by 0.1 per cent in the third quarter, and much the same drop had been expected for the fourth quarter. Over the whole of 2018, growth came in at 1 per cent, down from 1.6 per cent in 2017.

The new data could prompt the European Central Bank to cut its growth forecast of 1.7 percent for 2019, given that the increase in the fourth quarter was only half of what it forecast in December.

Research group IHS Markit has said that its closely watched index of activity in the region fell from a subdued 51.1 in December to an even worse 50.7 this month.

It was the weakest reading for five-and-a-half years and only just above the 50 benchmark that separates growth from decline.

The European Central Bank left interest rates in the eurozone unchanged this month, with president Mario Draghi admitting that economic growth in the eurozone was likely to be weaker than earlier expected.

ECB president Mario Draghi has admitted that economic growth in the eurozone was likely to be weaker than earlier expected.

Highs and lows: Italy's GDP, chain linked indices, charted from 2006 to 2018

The government that took office in Rome in June last year has argued that the economy has been weakening since early 2017 and has been hit recently by a slowdown in Italy’s main trading partners, China and Germany.

But critics say the coalition has aggravated the situation with their stand-off with Brussels over fiscal policy, creating a loss of market confidence which pushed up Italy’s borrowing costs and hurt the economy.

The government of the anti-establishment 5-Star Movement and the right-wing League has targeted GDP growth of 1 per cent this year, but most independent bodies expect it to be little more than half that.

Turbulent: Italy's quarterly GDP growth figures since 2011

A Reuters survey of 46 economists published this month forecast 2019 growth of 0.7 per cent. The Bank of Italy and the International Monetary Fund both forecast 0.6 per cent.

The coalition approved an expansionary budget in December aimed at heading off the growing threat of recession.

But it was watered down after European Commission objections at Italy’s high public debt levels.

Italy has been the eurozone’s most sluggish economy since the start of monetary union, and few analysts believe the budget can turn things around in the face of a broad European slowdown, weakening global trade and Italy’s chronically stagnant productivity.

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