GDP data spurs hope Italy emerging from recession

Bank of Italy and EC warn economic reforms still needed

GDP data spurs hope Italy emerging from recession

(By Emily Backus) Rome, August 6 - New data on Tuesday from the Italian statistical agency Istat added to the economic indicators suggesting Italy's longest recession since World War II could finally be easing. Istat on Tuesday reported Italy's gross domestic product (GDP) fell only 0.2% in the second quarter compared to the first - better than expected, but still the eighth consecutive quarterly contraction. GDP was 2% down compared to the second quarter of 2012. Istat also revealed that industrial production in Italy climbed 0.3% in June, rising - however tentatively - for the second time month-to-month; and automotive industrial production - a dismal font of news in recent months - soared 7.4% in June compared to May. The Italian government indicated that tax revenues have begun to rise again, and that GDP growth was expected to return in the third or fourth quarter, although GDP is forecast to contract about 1.8% for the year. The latest data comes on the tail of more encouraging figures from last week. Italy's July manufacturing purchasing managers' index (PMI) reported growth for the first time in two years, scoring a higher than expected 50.4 compared to 49.1 in June. Italian business optimism soared from June to July at more than double the eurozone average on the Economic Sentiment Indicator index. Italy's unemployment rate dropped to 12.1% in June, down 0.1% on the record high of 12.2% in May, according to Istat. And earlier this month Istat reported that purchasing power in Italian consumer households increased for the first time, quarter-on-quarter, since the fourth quarter of 2010. The Italian economy showed ''real'' signs of recovery, said sources close to a meeting held Monday between Premier Enrico Letta, Economy Minister Fabrizio Saccomanni and Bank of Italy chief Ignazio Visco. A Bank of Italy source cautioned ANSA, however, that recovery is ''gradual'' and ''the daughter of market stability''. The central bank pushed for more economic reforms showing ''continuity with choices made'' - a comment that seemed to point to reforms carried out or planned by Letta's predecessor, technocrat ex-premier Mario Monti, who also embarked on a series of austerity measures last year, including public spending cuts, tax hikes and pension reform. Monti also outlined an agenda for encouraging economic growth, including paying off tens of billions of euros worth of public sector bills due to the private sector, reforming Italy's rigid labour market and reducing taxes that weigh on workers' paychecks. The spread between Italian and German 10-year bond rates dropped dramatically under the Monti-led government, from well over 500 basis points when Monti was sworn to 250 basis points during this January's lows, and has remained under 300 basis points for most of this year. On Tuesday, the BTP-bund spread stood at 255 basis points, and the yield on Italian 10-year bonds was 4.25%. The spread is a key measure of Italy's borrowing costs and of investor confidence in the country's ability to weather the eurozone crisis. The Bank of Italy's warning to not let up on economic reforms was echoed by a European Commission spokesperson on Tuesday, who warned Italy to carry out EC recommendations made in May and called Istat's GDP data ''expected'' and in line with general recovery of the eurozone. Premier Enrico Letta has the difficult task of stimulating the economy while keeping tight control over public accounts, and of making political necessities converge with economic priorities. Both tasks have been complicated Letta's fragile right-left coalition. Government stability was once more shaken last week following the centre-right leader Silvio Berlusconi's conviction for tax fraud. Lawmakers belonging to Berlusconi's People of Freedom Party (PdL) have threatened to resign en mass, amid calls for Berlusconi to be granted a pardon. But on Tuesday, Letta sounded an upbeat note in a statement marking his first 100 days in office. The country is ''one step from reversing the path it is on and exiting from the darkest and most dramatic crisis recent generations have ever lived through,'' Letta said.

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