Italy

The Italian economy slipped back into recession this year, marking the third contraction since 2008, and is also showing the first signs of deflation.

The Organisation for Economic Cooperation and Development forecast is that the euro zone’s third largest economy is to contract by 0.4pc this year.

The revised projections for the first half of this year reveal that the economy unexpectedly contracted in both the first and second quarters.

Falling back into the recession and extending a slump that’s lasted most of the past three years, the Italian GDP unexpectedly shrank 0.2pc in the second-quarter of 2014, following a 0.1pc contraction in the first-quarter.

The GDP further contracted 0.10pc in the third-quarter of 2014, hurt by lower domestic demand. The last time the GDP expanded was in the second-quarter of 2011 when it grew 0.2pc. Year-on-year, the economy shrank 0.4pc in the third-quarter of 2014. There is a serious risk of deflation.

Consumer spending has dropped sharply since the onset of the crisis. Industrial production is down 0.5pc for the first nine months of 2014 over the same period a year ago.

Unemployment is 12.6pc, and rising. It averaged 9.20pc from 1983 until 2014, reaching an all-time high of 12.80pc in November of 2013 and a record low of 5.90pc in April of 2007.

Italy’s cabinet has approved a 2015 budget unveiling plans to increase borrowing to slash taxes by $23bn but promising to abide by deficit rules.

The Italian premier is firm in finding financial resources needed to fund reform agenda and has pledged to cut about 20bn euros in spending with the new budget.

He has promised to use up to 2bn euros next year to reduce Italy’s labour taxes, which are among the highest in Europe and weigh on small and medium businesses, blocking new hiring.

The labour overhaul aims at expanding unemployment benefits, replacing the state-funded wage guarantee funds with a universal unemployment benefit scheme.

The Italian government had initially planned to reduce the structural deficit by only 0.1pc in 2015 after passing a 36bn-euro budget for next year. The European Commission has provisionally accepted the 2015 budget as the revised deficit plan submitted for next year does not seriously breach EU rules for fiscal stability.

Meanwhile, the IMF has warned that Italian debt this year will rise to 136.7pc of GDP, compared to 132.5pc in 2013. For next year the Fund forecasts debt to be slightly lower at 136.4pc.

The government has forecast a debt to GDP of 131.7pc this year and 133.4pc in 2015, more than twice the EU ceiling of 60pc.

Economists are of the opinion that the government reforms now being put in place will not have an immediate impact but will provide a reduction in uncertainty for households and businesses that will lead to growth in future years.

The Italian GDP had fallen over 9pc from its 2008 level. Italy’s debt-to-GDP ratio is the second highest in the Eurozone.

Greece

GREECE appears to have emerged from a crippling six-year recession. Seasonally adjusted figures reveal that Greece posted three consecutive quarters of growth this year. The 182bn-euro economy expanded by 0.8pc in the first-quarter, the first expansion since the second quarter of 2009.

It then grew 0.3pc in the second-quarter and 0.7pc in the third-quarter on the back of earnings from tourism. But even if the economy continues to grow as forecast over the next two years, it would only return to about 80pc of its pre-crisis size in 2007. The Greek tourism sector is probably the only sector that has successfully resisted the economic crisis of the past six years.

A debt crisis and austerity imposed by EU/IMF since the recession of 2007 lenders deepened the recession, wiping out a quarter of the economy, cutting household income by 30pc, leaving over one in four Greeks unemployed and triggering violent protests.

The recession had left more than one in four Greeks jobless and reduced household income by nearly a third. It remains the Eurozone’s most indebted nation with debt forecast to top 177pc of the economy this year.

Despite the recovery, the country still faces several outstanding problems. It is expected to need more debt relief. It has largely managed to bring its finances back on track and posted a budget surplus before interest payments last year.

It also returned to bond markets successfully this year with two bond sales that raised a total of 4.5bn euros.

Analysts are now of the view that the country will improve its swollen debt ratios in 2014. The government is counting on reducing the debt burden next year to 168pc of GDP from 175pc this year.

Consumer prices are expected to fall moderately by 1pc in 2014, reflecting falling unit labour costs and the implementation of product market reforms.

Greek inflation rate in September, recorded the second lowest inflation rate at 1.1pc in the European Union. As the economic recovery gains pace, prices are expected to increase by 0.3pc in 2015. Unemployment rocketed from around 7pc in mid-2008 to nearly 28pc in September 2013. The rate fell to 25.9pc in August.

Unemployment among youths aged between 15-24 years continued to be particularly high but fell to 49.3pc, down from 58.6pc last year.

A staggering 3m of Greece’s 10.7m people have lost state health insurance due to long-term unemployment and their dependents lost benefits during the recession since 2008.

Published in Dawn, Economic & Business, November 24th, 2014