Italy's economy contracts in Q4, raising recession fears

By Gavin Jones

ROME (Reuters) - Italy's economy shrank by 0.1% in the fourth quarter of last year from the previous three months, preliminary data showed on Tuesday, a slightly smaller contraction than expected but still raising fears of recession.

On a year-on-year basis, fourth quarter gross domestic product in the euro zone's third largest economy was up 1.7%, national statistics bureau ISTAT said.

A Reuters survey of 23 analysts had forecast a 0.2% quarterly decline and a 1.6% rise compared with the year earlier.

While Italian output slipped slightly at the end of 2022, GDP across the whole euro zone expanded by 0.1% in the fourth quarter, Eurostat said, lifted by expansion in Spain and France.

Over the whole of last year, Italian GDP growth, adjusted for the number of working days, came in at 3.9%.

Looking ahead, the outlook has been clouded by sky-high inflation and energy costs, exacerbated by the war in Ukraine, which have sapped business and consumer confidence, crimped investments and hit families' spending power.

Italian bank Unicredit, which had forecast Italian GDP to contract by 0.1% this year, said after Tuesday's data that it was likely to upgrade its outlook to one of "modest growth".

"The stock of excess savings accumulated during the COVID-19 pandemic still amounts to a sizeable 8% of nominal GDP, thus remaining a growth-supportive factor for this year," said the bank's chief Italian economist Loredana Federico.

Rome is officially forecasting growth of 0.6% this year, and the International Monetary Fund on Tuesday also sharply raised its own 2023 estimate to 0.6%, from a forecast of -0.2% made in October.

The Treasury estimated in November that the economy would contract in the fourth quarter of last year and the first quarter of 2023, dumping the country in recession - defined as two consecutive quarters of falling GDP.

ISTAT said the fourth quarter saw a fall in domestic demand, which negatively outweighed a positive contribution from trade flows.

It gave no numerical breakdown of components with its preliminary estimate, but said industry and agriculture had declined during the quarter, while services grew.

ISTAT confirmed a 0.5% quarter-on-quarter growth rate for the third quarter but revised up the Q3 annual expansion to 2.7% from a previously reported 2.6%.

It said so-called "acquired growth" going into 2023 stood at 0.4%, meaning that even if GDP is flat in each of the four quarters of this year, full-year growth will be up 0.4% from the year earlier.

(Additional reporting by Stefano Bernabei; Editing by Crispian Balmer)