Italy Economy Seen Contracting Again, in Blow to Populists

(Bloomberg) --

Italy’s economy probably shrank again this quarter, according to the country’s statistics office, complicating the populist government’s efforts to meet its fiscal commitments.

A contraction in the three months through June would be the third in a year, highlighting the perilous state of the euro area’s third-largest economy. It grew in the first quarter, emerging from a short-lived technical recession, having been the only euro nation to post consecutive declines in 2018.

Rome-based Istat said there’s a “relatively high” probability of a drop in GDP this quarter. Economists surveyed by Bloomberg see expansion in the period, though the median prediction is just 0.1%. Istat maintained a forecast for full-year growth of 0.3%, with a modest recovery in the second half.

Another contraction would deal a body blow to Italy’s government at a time it’s engaged in tense negotiations with the European Union over a possible infringement procedure for failing to rein in its debt.

There are also tensions within the coalition itself, with disagreements over the best policies to help the economy. Prime Minister Giuseppe Conte travels to Brussels today to meet European Union counterparts.

Asked on Thursday whether the forecast complicates negotiations with the EU, Deputy Premier Matteo Salvini said, "quite the opposite. It actually tells us that cutting the taxes is an urgency and an emergency. If the economy is stalling the only ways to kick-start growth are public works and tax cuts.”

Developments in Germany, the economic engine of the euro region, may also be hitting output growth in export-reliant Italy. German manufacturing is in a slump and industrial production in April fell the most in almost four years. In Italy, production declined for a second month, by 0.7%.

--With assistance from Dan Liefgreen.

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jerrold Colten

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