Data from the Italian National Institute of Statistics indicates that the country’s economy shrank by 0.9% in the October and December quarter – the seventh consecutive fall. The figures confirm an earlier NIS estimate and mean that Italy’s gross domestic product in the quarter was 2.8% less than a year earlier.
The data follows Fitch’s decision on Friday to downgrade Italy’s credit rating from A– to BBB+. The ratings agency cited increased political uncertainty caused by the ‘inconclusive’ results of Italy’s parliamentary elections last month as the main reason for the downgrade, warning that this could jeopardise further structural reforms. The elections produced a hung Parliament and formal talks on forming a new government are not scheduled to begin until after Parliament reconvenes on Friday.
Italy’s recession is one of the deepest in Europe and recent falls in employment and business sentiments have increased the risk of a ‘more protracted and deeper’ downturn than previously expected, Fitch explained. The agency now forecasts a 1.8% decline in Italy’s GDP this year, following last year’s 2.4% contraction.
It also now expects Italy’s government debt to peak this year at close to 130% of GDP, compared to the 125% it projected in mid-2012.
Assigning a negative outlook to the rating, Fitch warned that Italy could be further downgraded in the event of a ‘deeper and longer recession than currently forecast’ which ‘undermines the fiscal consolidation effort and increases contingent risks from the financial sector’.
Italy could also suffer from a re-intensification of the eurozone crisis, which might lead to it having to contribute more to the currency bloc’s bailout funds. A worsening in the crisis could also ‘further weaken the economy through a fall in external demand, weaker confidence and tighter credit conditions’, Fitch noted.
The agency added: ‘The current rating reflects Fitch's judgement that Italy will retain market access and, if needed, EU intervention would be requested and provided to avoid unnecessary strains on sovereign liquidity.
‘Furthermore, Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by euro area policy makers. It also assumes that the risk of fragmentation of the eurozone remains low.’
