Mama mia! Italy, now in recession, stunts Europe’s growth prospects

Milan – Italy has slipped back into recession just four years after its last one, official figures showed Thursday. It’s a development likely to renew concerns about the outlook for the 19-country eurozone economy.

The Italian statistics agency said the country’s economy, the eurozone’s third-largest, contracted by a quarterly rate of 0.2 percent in the fourth quarter. That follows a 0.1 percent drop in GDP in the previous three-month period, meaning Italy is in a technical recession, defined as two straight quarters of economic contraction.

Italy’s recession is one reason why the wider eurozone slowed in 2018. Statistics agency Eurostat said Thursday the eurozone grew by a meager 0.2 percent in the final quarter, the same as in the previous period.

As a result, the eurozone economy expanded by 1.8 percent in 2018 overall. That’s lower than had been anticipated a year ago, when the bloc was expected to slow only slightly from 2017’s strong 2.3 percent rate.

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Italy’s slump is adding concerns for the region’s 2019 outlook. “Eurozone data releases have provided a poor start to the year with growing fears of a global slowdown and sentiment continuing to plummet,” Oxford Economics wrote in a Thursday note. “Lower external demand [has been] a strong drag on the bloc’s manufacturing sector. But today’s release of Italian Q4 GDP showed that it was weak domestic demand that dragged Italy into a recession in H2 2018.”

The Italian economy has become an acute source of concern over the past few months, partly as a result of the new populist government’s spat with the European Union’s Executive Commission over its budget plans. The government wants to ramp up spending to get the Italian economy going by providing more social security payments and rolling back a pension reform.

Ahead of the confirmation of the recession, Italian Premier Giuseppe Conte had said Wednesday that even if the contraction continues into the first months of 2019 “there are elements to hope for redemption in the second half.”

A call to cut spending

The EU Commission, worried about a renewed flare-up of the region’s dormant debt crisis, has insisted that the Italian government rein back its spending plans because they have the potential to further swell the country’s high debt levels.

Italy hasn’t been the only reason the eurozone slowed in 2019. Germany, Europe’s biggest economy, suffered an unexpected contraction in the third quarter largely due to changes in emissions standards that hurt auto sales. And uncertainty over Britain’s exit from the EU has weighed on sentiment, as has the fear of a global trade war stoked largely by growing tensions between the U.S. and China.

Separate economic indicators point to further weakness at the start of 2019, and most economists expect a difficult period ahead if the main causes of uncertainty aren’t addressed soon.

“The continued decline in sentiment indicates that the underlying pace of growth has slowed even further,” said Christoph Weil, an economist at Commerzbank. “Uncertainty about economic developments in China, the unresolved trade conflict between the U.S. and China, and Brexit continue to weigh on the economic outlook for 2019.”

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