The Italian economy has officially fallen back into recession after just 5 years since the last recession in 2013. The negative growth figures come at a worrying time; so soon after the newly formed Italian Government finally came to an agreement with the European Commission over the 2019 budget. The Italian Prime Minister Giuseppe Conte has said he expects growth to reach 1% this year with some optimism for 1.5%, although this is at loggerheads with both the International Monetary Fund and the Bank of Italy’s view that the number will be closer to 0.6%.
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If the growth numbers deteriorate further then this is likely to be negative for euro exchange rates. There is also the prospect of contagion spreading to other EU states if there is a sharp negative downturn. Italy’s debt is running at about 130% of GDP, which is proving to be such a burden on the economy that it will could well be the next trigger for a Eurozone crisis. A slowdown in growth could see that 130% debt ratio rise higher, causing panic in Italy and beyond.
Germany too is expected to have gone into a technical recession with two consecutive quarters of negative economic growth. Industrial output across France and Spain has also been declining which paints a gloomy outlook for the EU considering that four of the biggest economies which represent about 75% of the EU’s GDP are seeing a decline in economic activity.
The euro has received mixed signals after services sector data from the Purchasing Managers Index (PMI) arrived better than forecast at 51.2 in January. Retail sales on the other hand took a dive for the worse arriving in negative territory at -1.6% for January. The markets will be particularly interested in next week’s GDP numbers in light of the declining economic picture in the biggest economies. Any drop in growth will take Europe closer to a recession and could see the euro weaken. The last quarters’ GDP arrived at just 0.2% which is very close to stagnation and signals that there could be worse to come for euro exchange rates.
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