Recession returns to Italy, darkening outlook for Europe

The eurozone's third largest economy slips back into recession as the region still recovers from the previous debt crisis. European lawmakers urge the country to rein in its spending. 

Maurizio Brambatti/ANSA/AP
Italian Premier Giuseppe Conte delivers his speech during the inauguration ceremony of the ACSD (Africa Center for Climate and Sustainable Development) in Rome on Jan. 28, 2019. The Italian economy, the third-largest in the eurozone, has fallen back into a recession.

Italy has fallen back into recession, intensifying concerns about the 19-country eurozone economy and a possible flare-up in the debt market jitters that have haunted the bloc in the past.

The Italian economy, the third-largest in the eurozone, contracted by a quarterly rate of 0.2 percent in the fourth quarter of 2018, the national statistics agency said.

Following a 0.1 percent drop in the previous three-month period that means Italy is in a technical recession, defined as two straight quarters of economic contraction – just four years after its last one.

Italy's recession is one reason why the wider eurozone slowed in 2018, along with uncertainties related to Brexit, the China-US trade spat, and new vehicle emissions standards.

Though the eurozone is performing better than in the dark days of the debt crisis, which threatened to break up the euro currency, it's still lagging the US economy, which is projected to have grown about 3 percent in 2018. As a result, unemployment in the eurozone is about double that of the US's 4 percent at 7.9 percent.

The eurozone economy as a whole grew by a meager 0.2 percent in the final quarter, the same as in the previous quarter, according to provisional figures released Thursday by the Eurostat statistics agency.

It expanded by 1.8 percent in 2018 overall, its weakest rate in four years. That's lower than had been anticipated a year ago, when the bloc was expected to slow only slightly from 2017's strong 2.4 percent rate.

The Italian economy has become an acute source of concern over the past few months, partly as a result of the new populist government's spat with the European Union's executive Commission over its budget plans, which has undermined business confidence and seen Italian borrowing rates in bond markets spike higher.

The government, elected against the backdrop of economic disappointment after years – even decades – of stagnant growth, wants to ramp up spending to get the economy going. It wants to provide more social security payments and to roll back a pension reform.

The plan means Italy would not reduce its debt load, which at over 130 percent is the highest in Europe after Greece.

The EU Commission, still haunted by the memory of the debt crisis that required bailouts for a number of countries, has insisted that the Italian government rein in its spending plans.

Italian Premier Giuseppe Conte sought to downplay the recession and placed the blame firmly on the trade spat between the US and China, which he says has weighed on Italian exports.

"This is a transitory factor," he told reporters in Rome.

The head of Italy's UNC consumer advocate organization, Massimiliano Dona, said the weak figures raise questions over the Italian government's prediction that the economy will grow by 1 percent in 2019. He said that could mean the government will have to adjust its spending plans.

Italy hasn't been the only reason why the eurozone slowed in 2019. Germany, Europe's biggest economy, suffered an unexpected contraction in the third quarter largely due to changes in emissions standards that hurt auto sales. And uncertainty over Britain's exit from the EU has weighed on sentiment, as has the fear of a global trade war stoked largely by growing tensions between the US and China.

Separate economic indicators point to further weakness at the start of 2019 and most economists expect a difficult period ahead if the main causes of uncertainty are not addressed soon.

"The continued decline in sentiment indicates that the underlying pace of growth has slowed even further," said Christoph Weil, an economist at Commerzbank. "Uncertainty about economic developments in China, the unresolved trade conflict between the US and China, and Brexit continue to weigh on the economic outlook for 2019."

This story was reported by The Associated Press.

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