Italy shrank further into recession in the second quarter for a 2.5 percent yearly decline, data showed on Tuesday, threatening attempts by Mario Monti's technocrat government to control a debt crisis that is undermining the whole euro zone.
A 0.7 percent fall in gross domestic product, only slightly better than the first quarter's 0.8 percent decline, means the Group of Seven economy has now been contracting for at least a year, according to figures from government agency ISTAT.
This will weaken tax revenues and hit jobs and consumer spending, a vicious circle which makes it harder for Monti, who is aiming to cut the budget deficit to 0.1 percent of GDP in 2014, to meet his public finance goals. Italy has been the euro zone's most sluggish economy for more than a decade and is at the forefront of the debt crisis, with borrowing costs bordering levels seen unsustainable over the long run.
Investors have become increasingly concerned about Italy's ability to bring down public debt of around 123 percent of output - a mood that threatens to spill further into the bloc. Monti passed austerity measures worth more than 20 billion euros at the end of last year to head off a mounting debt crisis but the package, made up largely of tax hikes, sapped consumer morale and deepened the recession.
"The austerity measures are obviously weighing on the economy," said Vincenzo Bova of MPS Capital Services. "Investments and consumption, both private and public, are the hardest-hit areas." Tuesday's data was slightly weaker than expectations. The median forecast in a Reuters survey of analysts pointed to a 0.6 percent fall. Activity may have been weakened in the second quarter by a powerful earthquake that crippled industry in the productive northern region of Emilia-Romagna, but analysts saw the decline continuing.
"There is no sign of any change of trend for Italy," said Intesa Sanpaolo analyst Annamaria Grimaldi, who forecast there would be no return to growth in the euro zone's third-largest economy until "well into 2013".