Italy's recession set to be longer and deeper than expected

Service sector shrinks for 11th consecutive month as consumer spending collapses after wages, pensions and benefits cuts

Phillip Inman and agencies

guardian.co.uk, Friday 4 May 2012 11.31 BST

http://www.guardian.co.uk/business/2012/may/04/italy-recession-longer-deeper-expected

Italy's recession is likely to be longer and deeper than expected after its services sector shrank for the 11th month running in April and at its sharpest rate for almost three years.

A collapse in consumer spending following cuts in wages, benefits and pensions was behind the fall in output shown in Friday's data and follows the worst manufacturing numbers for three years earlier in the week.

The dire figures from Rome added to a picture of weakening demand across the eurozone's vast services sector, which shrivelled at a much faster rate in April than initially thought.

Economists suggested that the currency bloc's recession could extend beyond the summer after output contracted in core countries such as France and the Netherlands along with Italy and Spain.

Madrid will come under further pressure from unions and anti-poverty campaigners to relent on public spending cuts scheduled for this year after the services sector fell to 42.1 from 46.3 in March.

The final reading of April's Markit purchasing managers index (PMI) for the entire eurozone services sector came in at 46.9, a full point lower than the preliminary reading of 47.9 reported two weeks ago, which itself was far weaker than City analysts had expected.

It was the steepest downward revision to the PMI since October 2008 and the immediate aftermath of the Lehman Brothers collapse.

Anything below 50 signifies contraction.

Survey compiler Markit attributed the revision to business conditions worsening at a faster rate towards the end of the month, and said the figure was consistent with a 0.5% quarterly rate of economic contraction.

A dearth of new orders suggested the figures for May could be even worse.

"Little can be said to remain of any 'core' of strength in the region," said Chris Williamson, chief economist at Markit.

"Growth has practically ground to a halt even in Germany, and France has joined Italy and Spain in seeing a strong rate of economic decline."

On Thursday, European Central Bank president Mario Draghi said the eurozone economy would recover gradually over the year. But the latest PMIs, which have a good record of tracking economic growth, suggest he will have to wait a while yet.

"Stimulus measures implemented by the ECB have not had a lasting impact on the real economy. Confidence also fell back further in April," said Williamson.

Eurozone unemployment hit 10.9% in March, equalling a record high set 15 years ago, and the latest PMIs suggest that is unlikely to improve.

New business, backlogs of work and input and output prices all showed significant downward revisions compared with the initial flash readings.

Annalisa Piazza of analysts Newedge Strategy said Spain and Italy's figures present a worrying picture for activity in the sector.

"Both Italy and Spain are suffering from a marked cyclical slowdown and tight fiscal conditions add further pressure on domestic demand. Today's PMI figures clearly point to further deterioration in the second quarter, with risks of another sharp contraction in activity," she said.