This article is more than 1 year old

This article is more than 1 year old

Italy’s economy fell into recession in the final three months of 2018, in a blow to the country’s governing radical centre-right coalition, which pledged to boost the country’s persistently low GDP growth.

The 0.2% drop in the eurozone’s third largest economy between October and December followed a 0.1% fall in the previous three months, the Italian statistics agency said. Declining GDP growth over two consecutive quarters put Italy in recession. It is the third time the country has fallen into recession in a decade.

Amid weakening growth rates across the eurozone, which led to the 19-member currency bloc increasing its GDP by only 0.2% in the final three months of 2018, Italy is likely to be forced to rewrite its forecasts for growth in 2019.

James Athey of Aberdeen Standard Investments said: “The growth forecasts on which the budget was based have already been blown out of the water and eurozone growth continues to weaken. Italy is going to have to face up to some real problems.”

Italy’s economy has been shrinking steadily since the rightwing League party formed a coalition with the anti-establishment Five Star Movement.

Analysts have blamed much of the slump on a running battle between Rome and Brussels over the coalition’s plans to increase its budget deficit and stimulate the economy with a range of tax cuts and spending increases.

The dispute ran for months, hurting economic confidence and driving up Italy’s borrowing costs, before a settlement was reached just before Christmas.

Italy’s prime minister, Giuseppe Conte, blamed the recession on external factors, including trade tensions between the US and China.

The deputy prime minister Luigi Di Maio, the head of the Five Star Movement, said the recession was proof that Europe’s budget rules should be relaxed to allow Italy to stimulate its economy back to growth.

Di Maio heaped blame for the downturn on the previous centre-left government, which was ousted last spring. He said this year’s EU parliamentary elections would effectively be a referendum on eurozone fiscal policy, adding: “I believe this referendum will have a positive outcome for those who are against austerity.”

Andrea Iannelli, an investment analyst at the fund manager Fidelity International, said the government was right to highlight falling demand from its neighbours and trade wars for the country’s woes.

“However, the standoff between the government and the European authorities over the budget in the summer of 2018 has exacerbated the country’s weaknesses.

“The sell-off in Italian assets and rise in yields is now feeding through into tighter lending conditions and weaker macro data,” he said.

The EU statistics agency, Eurostat, said the eurozone expanded by 1.8% in 2018 overall, the slowest rate of growth since 2014 and significantly down from 2017’s 2.3%.

One indication of the general slowdown across the continent came from European companies listed on the Stoxx 600 index, which have begun to report weaker earnings growth. The latest analysis by I/B/E/S Refinitiv shows profits are rising by an average 3.6% compared with the 4.8% expected last week and the 6% expected at the beginning of the year.

Germany, Europe’s biggest economy, suffered an unexpected contraction in the third quarter largely because of changes in emissions standards that dented car sales.

Uncertainty over Britain’s exit from the EU also weighed on sentiment that is expected to drag down growth in the final quarter when the data becomes available next month.

German retail sales fell at their steepest rate since 2007 in December and exports of cars to China also declined.

The dip in the eurozone’s fortunes could prompt the European Central Bank, which predicted a 0.4% growth rate in the final quarter, to cut its growth forecast of 1.7% for 2019.

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In separate figures released by Eurostat, unemployment in the eurozone remained at 7.9%. It equalled its lowest rate in more than 10 years in December and matched economists’ forecasts.

The jobless rates fell slightly in Italy and Spain, which still have the highest unemployment levels in the eurozone after Greece. Across the eurozone 75,000 fewer people were out of work than in November.

In the wider 28-country European Union, the jobless rate was 6.6% in December, also unchanged from November.