Italy: Encouraging Q2 Data, Though Political Crisis Festers

Consensus Forecasts

According to the preliminary estimate, GDP shrank by a less-than-anticipated 0.2% (q-o-q) in Q2, fuelling hopes that the current two-year recession may have reached a trough. However, a political crisis could impede Italy’s road to recovery after centre-right leader Silvio Berlusconi’s conviction for tax fraud was upheld by the supreme court earlier this month. While Berlusconi maintains the government must be allowed to continue in order to approve planned economic reforms, some centre-right politicians have threatened mass resignations. The turbulent political situation poses a problem for prime minister Enrico Letta, although a recent spate of encouraging data has provided some relief. Retail sales increased in m-o-m terms for the first time in fourteen months in May, rising incrementally by 0.1%. Domestic demand could receive some support from the unemployment rate easing to 12.1% in June and consumer confidence unexpectedly climbing in July for a second successive month. The pace of decline in industrial production moderated to -2.1% (y-o-y) in June from -4.3% in May, but remains very weak. Still, foreign demand helped the PMI for manufacturing climb from 49.1 in June to 50.4 in July, the first time in two years that it has exceeded the no-change mark of 50. Elsewhere, external headwinds appear to be easing somewhat as a rebound in EU demand drove a 1.2% (m-o-m) rise in exports in June, helping to generate a relatively healthy trade surplus of €3.1bn. GDP and private consumption forecasts for 2013 remain unchanged this month.

Consumer price inflation cooled to 1.1% (y-o-y) in July, from 1.2% in August, due largely to a slowdown in restaurant and hotel prices.

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