Robert HARNEIS - TDO- (FRANCE) - Italy’s economy contracted in the last quarter of the year, officially placing the country in recession.

Gross domestic product fell a quarterly 0.2 percent between October and December, following a 0.1 percent decline in the third quarter, and was up 0.1 percent on an annual basis, according to the national statistics bureau ISTAT.

The news confirmed Italy’s position as a no growth country thanks to the constraining nature of the Euro that ties it to Germany. Many economists believe that until the Italian currency breaks away from the Euro there can be no recovery.

The data presents a dilemma for the European Central Bank, which ended its bond-buying stimulus program late last year. So far Italian 10 year bonds have not suffered noticeably from this withdrawal of support but investors are nervous.

With some justification, the Italian government which took office in June last year was quick to blame its center-left predecessors for the latest slump. Deputy Prime Minister Luigi Di Maio said the data “certified the failure of the entire political class which Italians sent packing” at last year’s election.

Prime Minister Giuseppe Conte said government measures, much disputed by the European Commission, would ensure a firm recovery from the second half of this year.

Conte pointed out the euro zone’s third-largest economy has been weakening since early 2017 and has recently been hit by a slowdown in main trading partners such as China and Germany.

Critics say the coalition parties worsened the situation by fighting with Brussels over fiscal policy, damaging market confidence which pushed up Italy’s borrowing costs and hurt the economy.

Over the whole of 2018, growth came in at 1 percent, down from 1.6 percent in 2017.

ISTAT said the quarterly contraction at the end of the year was due to a fall in domestic demand, which outweighed a positive contribution from trade flows.

It gave no numerical breakdown with its preliminary estimate, but said industry and agriculture had been negative, while the service sector was “substantially stable”.

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

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

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

The budgetfeatures a new income support scheme for the poor and allows people to retire earlier. It also cuts taxes for the self-employed.

At the same time, Germany halved its economic forecast for 2019 from 1.8% to 1%. European economies are struggling. It underlines why EU leaders really do need to secure a deal with the UK, with ‘No Deal’ on 29th March likely to further hit European economies.

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