Rome has been locked in a bitter dispute with the European Commission (EC) over its spending plans, which have already been rejected over claims they are in serious breach of EU fiscal rules. The spat has put the eurozone on edge as fears of Italy being driven out of the euro began to emerge with Rome initially refusing to alter the budget. A Goldman Sachs report this week claimed Italy would “flirt with recession at the start of next year” if the dispute with the EC remained “unresolved”. The paper, entitled ‘Landing the Plane’, goes on to accuse Rome of “casting a dark cloud” over Europe and labelled Italy as one of the key risk factors looming over the European market for 2019.
It read: “The European economy faces a range of risks in 2019 that could make the outcome worse than we expect.
“Italy’s budget crisis remains unresolved and we expect the Italian economy to flirt with recession early next year.
“Although the budget tensions might have to get worse before they get better, we see the economic spillovers from Italy as manageable, unless financial contagion rises sharply.”
Italy’s economy contracted in the third quarter for the first time in four years, data showed on Friday.
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Gross domestic product (GDP) in the euro zone’s third largest economy fell by 0.1 percent in July-September due to weaker domestic demand, according to statistics bureau ISTAT.
On a year-on-year basis, GDP rose 0.7 percent.
A recession is defined by economists as GDP falling for two consecutive quarters.
Andrea Montanino, Confindustria’s chief economist of employers, described the figures as “worrying” as she detailed the prospect of Italy being plunged into recession.
She said: “It’s a worrying figure that could lead us to technical recession in the last quarter of the year.
“We are forecasting a flat fourth quarter with downside risks due to falling confidence indices.”
The Goldman Sachs report forecasts Italy’s GDP will grow by 0.4 percent next year.
The Italian economy has been slowing steadily for the last 18 months with second quarter growth being unrevised at 0.2 percent on the quarter and 1.2 percent year-on-year.
In more positive news for Italy, data released today showed the services sector returned to growth in November after contracting the previous month.
The IHS Markit Business Activity Index for services rose to 50.3 in November from 49.2 in October, hinting at the possibility for growth in the fourth quarter.
In October, the services sector had contracted for the first time since May 2016.
A senior Italian government figure today revealed new budget numbers will be presented to the EU by next week.
It is understood the new spending plans will reign in promised pension reform and income support in the hope of avoiding disciplinary action from the EU.
Italy had been planning a deficit budget of 2.4 percent for 2019, up from 1.8 percent this year.
Giancarlo Giorgetti, cabinet undersecretary and senior figure in the ruling coalition’s League party, told Radio 24: “The (EU) infringement procedure is not good for the country.
“Both Italy and Europe must do everything to avoid it.”
Italy has the second highest debt in the eurozone as a share of economic output after Greece, at about 131 percent of GDP.