World Economy

Italian Growth Stagnates

Italian Growth StagnatesItalian Growth Stagnates

Italy’s economy stalled in the second quarter of the year, official data indicated Friday, exacerbating fears a sluggish recovery from recession is running out of steam.

Output in the three months to the end of June was the same as in the first quarter of 2016, leaving annual growth at 0.7%, AFP reported.

Finance Minister Pier Carlo Padoan had recently predicted 0.1-0.2% quarter-on-quarter growth.

Italy’s economy, which has barely expanded since the country became a founder member of the eurozone in 1999, emerged from three years of recession at the start of last year.

The Bank of Italy and the International Monetary Fund have both revised down their economic outlook, predicting growth of less than 1% this year. Political uncertainty ahead of a referendum that’s threatening to topple the government, and banks’ high share of non-performing loans, are weighing on domestic demand, while trade is damped by clouding global prospects and a looming recession in the UK following its Brexit vote.

The GDP report “is a blow, there is no question about it,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. “It really underlines what a difficult spot Renzi finds himself in now.”

Premier Matteo Renzi has staked his political fate on a referendum which aims to give Italy a more stable government by curtailing the powers of the Roman Senate. He is expected to call the vote in November.

German growth slowed less than analysts predicted in the second quarter, the Federal Statistics Office in Wiesbaden said earlier on Friday. GDP in the eurozone’s largest economy rose a seasonally-adjusted 0.4%, twice the rate forecast in a Bloomberg survey.

While cheaper oil, a weaker euro and unprecedented stimulus by the European Central Bank helped the Italian economy to emerge last year from its longest slump since World War II and expand for five straight quarters, output remains about 8% below its pre-crisis peak. The euro region has regained that level and its main economies, France and Germany, have long surpassed it.

In Italy, unemployment remains above 11% and unexpectedly increased in June. Industrial production declined the most in almost two years in the second quarter, Istat said in a separate report last week.

  Fresh Stimulus

Renzi is considering fresh stimulus measures to boost Italy’s languishing economic recovery, as the prime minister tries to strengthen his chances of winning a crucial November referendum on constitutional reform.

Since Renzi came to power in 2014, he has sought more budgetary leeway from the EU in order to prop up Italy’s sluggish economy and help his political prospects, often triggering tensions with the bloc’s officials.

Renzi, the 41-year-old former mayor of Florence, and his aides are weighing the merits of pension increases and extra funds for the poor in this autumn’s budget, as well as bringing forward an income-tax cut—originally planned for 2018—to next year. The prime minister outlined some of these measures in a speech in northern Italy earlier this week, while others were floated earlier this year.

However, Italy’s recovery from a triple-dip recession has weakened this year, which narrows the prime minister’s spending and tax relief options under EU budget rules. “The global picture has changed, the macroeconomic picture has worsened and this makes it difficult for us to meet our fiscal goals,” a senior Italian official told the FT this week.

“But we want to—as much as possible—give support to the economy and not jeopardize growth,” the official added, insisting that nothing had yet been decided.

Rome is due to publish its budget by mid-October and the following month Italians will vote in a referendum on constitutional reforms, on which Renzi has staked his political future by threatening to resign if he loses.

“Renzi needs a budget that he can sell to the people—an expansionary budget,” says Francesco Giavazzi, an economist at Bocconi University in Milan. “With Brussels he will—as much as he can—play the card of ‘if you don’t help me you risk having someone else in my place’.”