Italy's Economy is Forecast to Shrink by 2.3% this Year

Italy's economy is forecast to shrink by 2.3 per cent this year and by 0.5 per cent in 2013, the statistics office Istat said, as the country continues to wallow in a recession. Istat, which revised down an earlier forecast, was more pessimistic about the state of Italy's economy next year than the government, which in September forecast that business activity would contract by 0.2 per cent in 2013.

Gross domestic product (GDP) is expected to fall by 2.3 per cent due to a slump in domestic demand, which would only partially be offset by external demand as import growth is projected to turn strongly negative, Istat said. "Total investment will drop substantially due to tight credit conditions and persistent negative economic sentiment (while) private consumption is expected to fall," reflecting a drop in purchasing power and rising unemployment. Istat said growth in 2013 would shrink by an additional 0.5 per cent due to continued weakness in private consumption and investment, while exports would serve as a crutch.

The agency outlined a number of risks to its outlook. "A revival of euro-area financial tensions, widening sovereign credit risk spreads on Italian bonds and a slower-than-expected global trade recovery could... lead to a deeper and longer recession in 2013," it warned. Istat also released figures on Monday forecasting a rise in unemployment to 11.4 per cent next year, up from an average of 10.6 per cent this year.