Italian GDP out earlier today showed that the economy has shrunk by 0.7% during the second quarter as the government austerity measures kick in. Factory production and in particular consumer spending have been hit. Compared to the previous year growth has fallen by 2.5%. The austerity measures put in place by Mario Monti ’s party are at €20bn as it continues to have problems controlling borrowing costs and fears of the Euro zone crisis getting worse. Many investors are worried that Italy, which is the third largest economy within the Euro zone could face the same problems that have plagued Greece, Ireland and Spain over the last few months. The long term forecast for the Euro still appears to be negative and many predictions for 3-6months are possibly as high as another 8 cents from where we are now.
However, watch out for tomorrow morning’s Bank of England Quarterly Inflation Report. This is often one of the month’s biggest market movers and will provide us with some indication as to how the Bank may base its future interest rate decisions or go down the line of further Quantitative Easing. So far the BoE has used £375bn of QE with some analysts expecting as much as £500bn. I would be inclined to agree that more QE will happen before the end of the year but the BoE will not cut interest rates as QE appears to have worked…to a degree…so far.