Italy: Recession Continues as Labour Market Weakens

Consensus Forecasts

There are no signs of an end to the longest Italian recession on record as rising unemployment continues to decimate consumer spending. The breakdown of the Q1 national accounts confirmed that GDP shrank for a seventh successive quarter, by -0.6% (q-o-q) and -2.4% (y-o-y). There were also contractions of 0.5% (q-o-q) and 3.3% in private consumption and gross fixed investment, respectively. The unemployment rate climbed to a new record-high of 12.0% in April. Joblessness amongst 15-24 year olds soared to 40.5% over the same period, and Prime Minister Enrico Letta said earlier this month that his government wants to reduce this figure to below 30% via fiscal breaks and laws to limit the use of temporary employees. Many of those parents that are currently employed are saving their earnings to provide security for their job-seeking children, and this is constricting investment and consumption, as reflected in a 0.3% (m-o-m) decline in March retail sales. Elsewhere, industrial production fell by 4.6% (y-o-y) in April, due largely to continued weakness in the manufacturing sector. Certainly, on the domestic front, consumers are cutting back on all but the most necessary spending on big-item durables, for example. Despite this, the PMI for manufacturing rose to a four-month high of 47.3 in May after an upturn in foreign demand resulted in a weaker pace of decline in new orders. Still, our panel has slashed its 2013 GDP forecast this month.

The European Commission recommended last month that Italy be removed from the Excessive Deficit Procedure after reducing its budget deficit to within the EU requirement of 3%. The move offers some relief to the fledgling government as it can now focus on a few ideas to kickstart activity.

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