News in the eurozone’s third largest economy is once again on the dismal side. Italian Industrial Production Plunged more than expected as did GDP.

Italian industrial production declined more than forecast in June, signaling the euro region’s third-biggest economy probably contracted for a fourth quarter. Economists forecast a decline of 1 percent, according to the median of 16 estimates in a Bloomberg News survey. Production fell 8.2 percent from a year ago on a workday-adjusted basis.

Italian business confidence declined last month more than economists forecast as executives became more concerned that the country’s economic recession will deepen in coming months.

Fiat SpA (F) temporarily stopped new investments in Italy as the European debt crisis caused sales in the region to plunge. Italian car sales have plummeted 20 percent through July, with deliveries this year on track to slip to the lowest level since 1979.

Italy to Pay Civil Servants 80% of Their Salary to Do Nothing

To plug the rising deficit gap, Prime Minister Mario Monti approved Deep Cuts in National Spending (a needed measure but not how they went about it), and also hike the VAT by 2% (economic insanity in a deepening recession).

Italy’s government has agreed to cut spending by 26bn euros (£21bn, $32bn) over the next three years to plug the gap between spending and income.

Staffing levels will be assessed by October. Some workers will be sent home for two years on 80% of their salary before losing their jobs or being retired.

The package means the country will not now need to bring in an unpopular increase of 2% in value added tax (VAT) and will be able to funnel 2bn euros to the Emilia Romagna region, which was hit by two earthquakes in May.

The cost of servicing Italy’s debt increased by 16% to 18.7bn euros, up from 16.2bn euros in the first quarter of 2011.

Italy Recession Lingers for Year

The official estimate for decline in GDP this year was -1.2% (revised lower from about half that). Prepare for another downward revision as Italy’s Recession Pain Deepens.

Italy shrank further into recession in the second quarter for a 2.5 percent yearly decline, data showed on Tuesday, threatening attempts by Mario Monti’s technocrat government to control a debt crisis that is undermining the whole euro zone.

A 0.7 percent fall in gross domestic product, only slightly better than the first quarter’s 0.8 percent decline, means the Group of Seven economy has now been contracting for at least a year, according to figures from government agency ISTAT.

This will weaken tax revenues and hit jobs and consumer spending, a vicious circle which makes it harder for Monti, who is aiming to cut the budget deficit to 0.1 percent of GDP in 2014, to meet his public finance goals.

A Reuters survey of analysts last month forecast that the budget deficit this year would be 2.3 percent of GDP, compared with Monti’s 1.7 percent target, and 1.3 percent in 2013, when the government forecasts a 0.5 percent shortfall.

ISTAT gave no numerical breakdown of GDP components with its preliminary estimate, saying only that activity contracted in agriculture, industry and services.

ISTAT said so-called “acquired growth” at the end of the first quarter stood at -1.9 percent.

This means that if GDP posts flat quarterly readings in the final two quarters of 2012, over the whole year it will be down 1.9 percent from the previous year.

Expect Debt-to-GDP to Rise

Italy’s debt-to-GDP ratio is 123%. Given rising borrowing costs and shrinking GDP, that number is going to go up, perhaps substantially.

Eurosceptic Government in 2013

What Italy needs is work rule reform, pension reform, a dramatically smaller government, and lower taxes. As with Spain, work rule and pension reform is very slow in coming but tax hikes have been plentiful, exactly the wrong approach.

A eurosceptic government may be on the way next year as Mario Monti will step down in April.

Mike “Mish” Shedlock
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