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Italy Slashes Growth Forecast for 2012

Giulia Segreti in Rome and James Fontanella-Khan in Brussels
Thursday, 20 Sep 2012 | 9:55 PM ET

The Italian government has slashed its economic growth forecast for 2012, saying the eurozone’s third largest economy is now heading for a contraction of 2.4 per cent, twice as deep as it previously estimated.

Piazza Venezia, Rome, Italy
Panoramic Images | Getty Images
Piazza Venezia, Rome, Italy

Rome also revised sharply upwards its predicted public deficit for this year from 1.7 per cent of gross domestic product to 2.6 percent, and from 0.5 percent to 1.8 per cent in 2013, underlining how tough austerity measures have made fiscal consolidation more difficult to achieve.

It predicted the economy would continue to shrink next year, by 0.2 percent, rather than grow by a modest 0.5 percent.

Mario Monti, who as prime minister has pushed through painful tax rises and austerity measures, said: “The economic framework of the EU has improved with regard to [its] economic policies but has worsened with regard to the recession and the direction of interest rates, which remain high.”

Speaking after a meeting of his cabinet, Mr. Monti said he expected the eurozone’s third largest economy to recover in the second half of 2013 and to pick up speed in 2014, partly due to structural reforms implemented by his technocratic government.

Rome still expects to record a zero deficit in 2013 in structural terms, once the effects of the economic cycle have been stripped out.

The government aims to cut the national debt, second only to Greece in the eurozone, from 123 per cent of output this year to 116 percent in 2015.

The Italian forecasts compounded data showing eurozone private sector economic activity contracted at the fastest rate since June 2009, defying hopes that the European Central Bank’s unlimited bond-buying plan would help reignite growth in the single currency bloc.

The “flash” composite purchasing managers’ index, a gauge of manufacturing and services output, for the 17-country area fell from 46.3 in August to 45.9 in September, below 50 that indicates a contraction.

The accelerated slowdown in the eurozone was driven by France, the bloc’s second-largest economy, which suffered the steepest drop in new business in 41 months, whereas Germany showed signs of recovery.

There were also further signs of weakness in the eurozone periphery. Ireland recorded zero growth in gross domestic product in the second quarter as lower consumer, capital and government spending weighed on the economy.

The only sign of relief came from Germany as the composite PMI rose to 49.7 in September compared with 47 in August. The rise came as the services sector, an important indicator of economic performance, expanded for the first time since July, offsetting a contraction in manufacturing output.

The worse-than-expected data add further evidence that the eurozone’s gross domestic product will contract for a second consecutive quarter this year, pushing the region into its second recession in three years. GDP in the euro area shrank 0.2 percent in the three months to June.

“The eurozone downturn gathered further momentum in September, suggesting that the region suffered the worst quarter for three years,” said Chris Williamson, chief economist at Markit, which compiled the data.

“We had hoped that the news regarding the ECB’s intervention to alleviate the debt crisis would have lifted business confidence, but instead sentiment appears to have taken a turn for the worse, with businesses the most gloomy since early-2009 due to ongoing headwinds from slower global growth,” he added.

Howard Archer, European economist at IHS Global Insight, said that the encouraging data from Germany would not be sufficient to uplift the entire region, as there was continued evidence that the sovereign debt crisis troubling southern Europe was spreading to the bloc’s economically stronger core northern states.

“In Germany overall incoming new business continued to contract appreciably and employment fell,” said Mr. Archer. “The surveys heighten belief that the ECB will be cutting interest rates from 0.75 percent to a new record low of 0.50 percent sooner rather than later, with a move looking ever more likely in October.”

However, some economists said that the worst was over as the ECB’s announcement earlier this month that it would deploy unlimited monetary firepower to save the single currency by purchasing eurozone countries’ short-term bonds would help increase economic activity across the region.

“Given the easing of systemic risks engulfing the eurozone and the related turn in financial market conditions, we think that the PMI surveys will turn upwards in the coming months,” said Nick Kounis, economist at ABN Amro.

Additional reporting by Jamie Smyth in Dublin and Giulia Segreti in Rome

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