Italy has officially turned into a recession as GDP shrank 0.2% in the second quarter after shrinking 0.1% in the first quarter of 2014. The contraction has surprised analysts, who were expecting economic expansion in the EU state amid a broader continent-wide recovery.
Instead of recovery, the euro’s third-largest economy has released data indicating that the currency’s broader economy may be threatened by an unexpected downturn, which may in turn impact other nations within the European Union.
A String of Recessionary Woes
Italy was one of the PIIGS nations—Portugal, Italy, Ireland, Greece, and Spain—who were the focus of intense scrutiny in 2010 and 2011 as fears of a sovereign debt crisis and subsequent default send bond yields soaring in those nations.
While Greece was the hardest hit and Spain’s pre-2008 housing boom quickly turned to bust with youth unemployment surpassing 60% at its worst point, Italy’s economy remained relatively stronger thanks to its size and more diversified economy. However, Italy slipped into recession by 2012 and analysts have expected a recovery to accelerate in 2014, when the nation would go from contraction to growth. Instead, the nation is continuing its trend of contraction, leaving many analysts scratching their heads.
Some economists have already dismissed the release as a unique quirk of Italy.
“The euro-zone recovery, which began in spring last year and has gradually spread around most of the currency area, has not yet taken hold in Italy,” said Christian Schulz, an economist at Berenberg Bank in London. Schulz adds that Spain has risen “near the top of the euro-zone growth table courtesy of their sweeping reforms in the last three years.”
Falling German Output
Despite continued optimism that Italy’s recession is idiosyncratic, German factories reported orders fell 3.2% in June from the previous month, which had already been far below economists’ expectations.
While the fall in orders remains unclear, some economists and European Union officials are dismissing the numbers as an effect of geopolitical uncertainty. With the Ukrainian crisis continuing and tensions between Russia and the EU mounting, officials believe businesses are being more cautious in their orders for manufactured goods, which is impacting Germany’s factories and causing a slowdown.
Germany’s manufacturers aren’t the only ones to disappoint. The UK also reported industrial production has risen at a lower rate than expectations, and retail prices in the nation fell by 1.9% annualized in July, despite seasonal strength in the retail sector. Fears that the UK may be headed towards a deflationary spiral are offset by separate data from Halifax Bank, which show house prices in the nation have risen by the fastest pace since before the 2008 global financial crisis.
ECB Countermeasures Expected
With Italy falling into a surprise recession and German factories seeing lower orders, the European Central Bank is expected to keep its benchmark rate unchanged, which is currently at 0.15%, the lowest it has ever been. Analysts will also be looking to see if the ECB will continue its monetary stimulus policy, an action comparable to the Federal Reserve’s quantitative easing program that is slated to end by October.
Disappointing economic data has caused German bonds to fall to a record low, while Italy’s recession has caused their long-term bonds to rise. Credit-default swaps in Europe, a type of insurance used to insure against corporate debt losses, rose slightly.