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Italy’s economy shrinks in latest quarter, casting shadow over outlook

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-Italy’s GDP shrank by 0.4% in the second quarter from the first and its manufacturing sector contracted in August for a fifth consecutive month, according to data on Friday that cast a shadow over the country’s economic prospects.

The gross domestic product reading from national statistics bureau ISTAT, which cited weak domestic demand, compared with an initial reading of a 0.3% drop.

Year-on-year, GDP rose 0.4%, also down from ISTAT’s flash estimate of 0.6%.

The August manufacturing PMI index meanwhile came in at 45.4, up from 44.5 in July but still well below the 50 mark that separates growth from contraction, raising the risk of weak economic activity extending into the third quarter.

Rome is officially forecasting full-year 2023 growth of 1.0%, slowing sharply from the buoyant 3.7% rate in 2022.

Until a few weeks ago Prime Minister Giorgia Meloni’s government was describing the 2023 forecast as conservative, but UniCredit said after Friday’s data that downside risks to its estimate, also of 1%, were increasing.

The government is also preparing a 2024 budget that is expected to confirm Italy’s commitment to keeping its deficit on a downward trend, leaving little leeway for stimulus.

It will update its growth estimates and public finance targets by Sept. 27.

Italian ministers have repeatedly criticised the European Central Bank for sharply raising interest rates, saying its policy threatens to throw the euro zone into recession.

Italian think tank Prometeia said the Italian economy was going through a stagnation phase, although it still did not foresee a “full-blown recession.”

BLEAK BREAKDOWN

ISTAT said “acquired growth” at the end of the second quarter stood at 0.7%, meaning that if GDP was flat quarter-on-quarter for the rest of the year, full-year growth would come in at 0.7% compared with 2022.

The breakdown of GDP components showed investments and government spending contracted sharply in the second quarter compared with the first, while consumer spending stagnated.

Imports and exports both declined by 0.4%, meaning trade flows made a zero contribution to growth.

The sharp reversal in the second quarter came after a strong start to the year for what has been the euro zone’s most sluggish economy since the launch of the single currency.

The first-quarter GDP gains were unrevised at 0.6% quarter-on-quarter and 2.0% year-on-year.

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