Italy slides into recession as tough budget cuts bite

Italy has slid back into recession after the economy shrank 0.7 per cent in the fourth quarter following stringent budget cuts aimed at stabilising the public finances, official data showed yesterday.

The economy contracted 0.2 per cent in the third quarter and a recession is normally defined as two consecutive quarters of economic contraction. Figures from the Istat data agency showed overall growth of 0.4 per cent for 2011.

Italy’s last recession was during the global financial crisis in 2009.

The fourth quarter shrinkage was bigger than expected by analysts polled by Dow Jones Newswires, who had been forecasting a 0.4 per cent contraction.

Under attack on the financial markets over its giant €1.9 trillion national debt, Italy has adopted several large scale austerity packages since 2010 which have slowed economic activity.

The government is currently forecasting a gross domestic product (GDP) contraction of 0.4 per cent this year but the Bank of Italy has said it expects the shrinkage to be between 1.2 per cent and 1.5 per cent.

The International Monetary Fund estimates a fall of 2.2 per cent.

Prime Minister Mario Monti, a former eurocrat and economics professor, took over from Silvio Berlusconi in November as the head of an unelected technocratic government charged with rescuing Italy from financial disaster.

He has promised long-delayed structural reforms to boost growth.

The growth data comes a day after Italy announced it would not make a bid for the 2020 Olympics in order to save money and as the defence ministry announced sweeping defence cuts including a cut in F-35 fighter jet orders.

Defence Minister Giampaolo Di Paola said the number of armed forces and defence ministry personnel would be reduced by 43,000 to 170,000 over the next decade through hiring cuts and transfers.

He said F-35 orders from the United States would be cut from 131 to 90.

The army will also lose two of its 11 brigades, as well as reduce the number of tanks, armoured personnel carriers, artillery pieces and helicopters.

The number of warships and submarines will be reduced from 24 to 14.

Di Paola said some defence ministry property would be sold off “to contribute to a restructuring of the defence ministry and more generally to a financial recovery in the country.”

The Bank of Italy also announced that the public debt had gone down to €1.898 trillion in December 2011 from €1.905 trillion in November – but was still higher than the level of €1.843 trillion in December 2010.