Italian economy contracts for fourth straight quarter

Rome: Italy’s economy contracted for a fourth straight quarter in the three months through June amid an intensifying euro zone debt crisis.

Gross domestic product (GDP) declined 0.7% in the second quarter, Rome-based national statistics institute Istat said in a preliminary report on Tuesday.

The contraction was less than the median forecast for a 0.8% decline in a survey of 22 economists by Bloomberg News. GDP fell 2.5% from a year earlier.

Prime Minister Mario Monti’s government is implementing €20 billion ($25 billion) in austerity measures that pushed Italy deeper into its fourth recession since 2001.

His efforts have left the government on track to bring its budget deficit within the European Union limit this year, while leading to a surge in unemployment and a slump in consumer spending that is sapping growth.

“What you can see now is what you would expect from a country that had to raise taxes, cut public expenditure and bear the brunt of financial contagion in Europe,” Marco Valli, chief euro zone economist at UniCredit Global Research, said from Milan in a Bloomberg Television interview. “We had some signs in the current months that the recession trends are slowing down.”

Industrial output dropped 1.4% in June from May and 1.8% in the second quarter, Istat said on Tuesday. The economy will shrink 2.4% this year, employers lobby Confindustria forecasts.

Italian 10-year bond yields rose 2 basis points to 6% at 11.06am in Rome.

Italy, whose surging borrowing costs have moved it to the centre of the debt crisis, is not planning to tap the European rescue fund for the moment, Monti said last week.

His government is on track to trim its budget deficit to 2% of GDP this year, even while forecasting that the euro zone’s third-largest economy will contract 1.2%.

Italian business confidence declined last month more than economists forecast as executives are concerned the economic recession will deepen. Turin-based Fiat SpA, Italy’s biggest manufacturer, said last week it is suspending investment in Italy in response to the slump in demand and will focus on temporary layoffs to reduce costs.

Car production slumped more than 20% in the first half, Istat said on Tuesday.

Fiat chief executive officer Sergio Marchionne said he will make a decision about restructuring in Europe, including further plant closings, after third-quarter earnings.

Any further layoffs at Fiat, the company’s biggest employer, could further hit Italy’s unemployment rate, already at the highest in almost 13 years.

Andrew Frye contributed to this story.