Italy’s economy unexpectedly contracted in the second quarter, a setback for premier Giorgia Meloni’s government as it tries to sustain prosperity and cut debt.
Gross domestic product shrank by 0.3% from the previous three months — much worse than the zero growth that analysts surveyed by Bloomberg had estimated, and in contrast to overall expansion in the euro region.
Statistics officials attributed the slump to a drop in domestic demand, while net exports failed to contribute to growth. Industry and agriculture were particularly hit.
The data illustrate how activity in the euro zone’s third-biggest economy is starting to suffer from rising interest rates, weakening global export demand and the rollback of fiscal support: GDP had risen by 0.6% in the first quarter.
Italy’s contraction casts a shadow over its stewardship under Meloni’s coalition. Just last week, she touted the economic policies of her government as driving faster expansion than France and Germany. The International Monetary Fund now predicts Italian GDP will rise 1.1% this year.
As recently as last month, Finance Minister Giancarlo Giorgetti was claiming that the economy could even achieve growth of as much 1.4% in 2023, buoyed by a tourist boom in the first full summer season since the pandemic struck.
That effect might yet aid Italy in the second half of the year, but the China-led global slowdown for manufacturing is taking its toll, just as it is hitting Germany’s economy too.
In June, Italy’s factories had their worst month since the height of the pandemic lockdowns in early 2020, a survey of purchasing managers showed earlier this month. Figures for July due on Tuesday may show that persisting.
In the euro zone as a whole, the economy expanded 0.3% in the second quarter, according to data released Monday. France and Spain grew, outweighing stagnation in Germany and Italy’s contraction.
As well as the ongoing war in Ukraine and weakness in export markets like China, there’s uncertainty from the European Central Bank. While the most aggressive bout of monetary tightening in its history is nearing an end, it’s unclear whether there’ll still be another rate hike — or when it may come.
What will determine that will be prospects for inflation. Underlying annual price growth in the euro area, stripping out volatile elements such as energy, was unexpectedly strong as 5.5% in July, according to data released Monday.
The headline measure of inflation slowed to 5.3%, and Italy’s was slower than expected at 6.4%.
What Bloomberg Economics Says...
“The contraction provides further evidence that the European Central Bank’s monetary tightening is biting. We think activity will remain lackluster for the remainder of the year.
—David Powell, senior euro-area economist. For full report, click here
Weaker growth prospects and higher borrowing costs will make it more difficult for Meloni to keep Italy’s mammoth national debt in check.
The debt-to-GDP ratio remains above 140% and is likely to stay little changed over the coming year, according to European Commission forecasts.
--With assistance from Joel Rinneby and Chiara Albanese.
(Updates with euro area GDP in second paragraph)
