Shock drop in Italian and French economies amid wider European worries

By Gavin Jones and Leigh Thomas

ROME/PARIS (Reuters) – economies of France and Italy, respectively the euro zone’s second and third largest, shrank unexpectedly in the last quarter of 2019 causing GDP growth for the 19 countries sharing the single currency to miss forecasts, data showed.

French manufacturing output slumped in the face of strikes over an unpopular pension reform, putting more pressure on President Emmanuel Macron, while in Italy Friday’s data hit the outlook for 2020, dealing a blow to its 5-month old government.

The French economy shrank 0.1% in the quarter from the quarter before, when it grew 0.3%, data from INSEE showed, while Italy’s gross domestic product fell 0.3% between October and December, following an unrevised 0.1% rise in the third quarter, national statistics bureau ISTAT said in a preliminary estimate.

French Finance Minister Bruno Le Maire blamed the pension protests, which began in December, for the slowdown which he said would be temporary, adding that the fundamentals for French economic growth were “solid”.

Analysts at British bank Barclays backed Le Maire’s view. “We think this is likely to be a one-off, and thus remain confident in our cautiously optimistic outlook,” they wrote.

But AvaTrade chief market analyst Naeem Aslam said the French figures cast doubt over the European Central Bank’s views on the euro zone economy.

In another worrying sign for the ECB, the euro zone as a whole grew less than expected in the last quarter of 2019, a first estimate showed, while core inflation slowed in January.

Gross domestic product in the 19 countries sharing the euro rose 0.1% quarter-on-quarter for a 1.0% year-on-year gain, according to Eurostat, the European Union’s statistics office.

Economists polled by Reuters had expected a 0.2% quarterly and a 1.1% annual increase.

‘EVEN MORE CHALLENGING’

For Italy, the 0.3% GDP drop was the steepest decline since the first quarter of 2013 and was much weaker than expected. None of the 27 economists polled by Reuters had expected a quarterly contraction.

On a year-on-year basis, GDP was flat in the fourth quarter, following an upwardly revised 0.5% rise in the third.

Unicredit economist Loredana Federico said the negative carryover effect will make it “even more challenging” for Italy to get close to the government’s forecast of 0.6% growth this year. Her own forecast is for expansion of just 0.2%.

The International Monetary Fund has forecast Italian growth of 0.5% for 2020 and said its economy would be the weakest in the European Union over the next few years. [L8N29Y2Z4]

Economy Minister Roberto Gualtieri said heavy rains in November had probably subdued activity in the fourth quarter, and he expected a rebound at the start of this year, adding that “measures adopted by the government will support growth”.

The government of the anti-establishment 5-Star Movement and the left-wing Democratic Party cut income tax by some 3 billion euros in its 2020 budget approved by parliament in December.

Renato Brunetta, economics spokesman of Silvio Berlusconi’s opposition Forza Italia party, said the “disastrous” data showed the government “isn’t capable of managing the economy.”

ISTAT said the slump was due to a fall in domestic demand which was only partially offset by a positive contribution from trade flows.

It gave no numerical breakdown of components with its preliminary estimate, but said industry and agriculture had contracted, while services had been broadly stagnant.

Over the whole of 2019, growth came in at a preliminary 0.2%, slightly beating the government’s most recent forecast of 0.1%. That followed a 0.8% rate in 2018 and was the weakest since 2014.

Upward revisions to year-on-year growth in the second and third quarters propped up the full-year growth rate.

(Additional reporting by Giuseppe Fonte in Rome and Jan Strupczewski in Brussels; Editing by Alexander Smith)

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