Italy's economy unexpectedly shrank in the second quarter, edging it closer to the fourth recession in a decade as households and businesses struggle to cope with more expensive oil.
The economy, first of the three biggest in the euro region to report second-quarter growth, contracted 0.3 percent after expanding 0.5 percent in January to March, Istat, the Rome-based statistics office, said today. Economists expected stagnation, according to the median of 22 forecasts in a Bloomberg News survey. From the same period a year earlier, the economy didn't grow at all.
European Central Bank President Jean-Claude Trichet yesterday said economic growth will be “particularly weak'' through the third quarter after policy makers left borrowing costs at 4.25 percent. Italy is a bellwether for the effect record oil prices are having on the region.
“It's hard to imagine Italy doing better in the coming quarters,'' David Mackie, an economist at JPMorgan Chase & Co in London, said in a note. “It is difficult to escape the conclusion that Italy will experience a recession.''
Confidence Slump
Consumer confidence slumped to the lowest since 1993 as rising energy prices drove the inflation rate to the highest level in six years and borrowing costs rose. Manufacturing also stalled.
The price of crude, down by a fifth from a July record of $147.27 a barrel, is 65 percent more expensive than a year ago.
“The outlook for the euro zone isn't good at all,'' Neil Mackinnon, chief economist at ECU Group Plc in London, said on Bloomberg Television. “Higher interest rates aren't on the agenda, and I think the next ECB move is down. A recession is looming.''
ECB council member Nout Wellink said in an interview with Dutch RTL television today that second-quarter growth in the euro area “won't look that good.''
Gross domestic product in Germany, the region's biggest economy, declined 0.8 percent in the second quarter, according to the median forecast of 11 economists surveyed by Bloomberg. That would be the country's first contraction in four years. The GDP report is due Aug. 14.
Italy's economy will expand a mere 0.4 percent this year, the slowest pace since 2003, the Bank of Italy and the Isae research institute said last month paydayloans.com freecreditreport.
Lucky Escape?
Some economists, such as Morgan Stanley's Vladimir Pillonca, predicted the country would enter a recession as soon as the first quarter after a contraction in the final three months of 2007. That didn't happen, though predictions are still gloomy.
The government and the European Commission forecast growth of 0.5 percent, which would make Italy the laggard among the Group of Seven leading industrial countries and the 15 nations sharing the euro. Italy's expansion has already trailed the European Union average for more than a decade.
“The outlook for the Italian economy has deteriorated at an alarming pace,'' Jonathan Loynes, an analyst at London-based Capital Economics, said in a research note. “Unless Italy can quickly implement much-needed economic reforms it may start to lose ground to the rest of the euro zone.''
Unpopular Measures
To stimulate growth, Prime Minister Silvio Berlusconi has pledged unpopular measures such as reducing the state bureaucracy and raising the average pension age from 58.
Italian industrial production stagnated in June as oil prices were edging toward an all-time high. Indesit Co., a maker of washing machines, said on July 30 that 2008 earnings will be lower than last year's and Fiat SpA, the country's biggest automaker, idled four car factories last month in the face of slowing demand.
On the consumer side, Italians are cutting back on spending on everything from new cars to clothes. New auto sales fell for a seventh month in July. Italian retail sales declined for the 17th month in July, the Bloomberg purchasing managers index showed.
Italy has slipped to 46th in the World Economic Forum's 2007- 2008 competitiveness ranking, trailing Latvia and Bahrain. The country came last in terms of labor productivity — a key measure of economic growth and competitiveness — among the 30-member Organization for Economic Cooperation and Development.
The Italian statistics office didn't provide a breakdown of the GDP figure. Istat will release its final report on Sept. 10.
European Central Bank President Jean- Claude Trichet said economic growth will be “particularly weak'' through the third quarter, suggesting policy makers are wary of raising interest rates again to curb inflation.
While the ECB's decision to raise borrowing costs last month was justified by the inflation threat, risks to growth “are materializing,'' Trichet told reporters in Frankfurt today after keeping the benchmark rate at 4.25 percent. “Overall, downside risks prevail.''
The euro dropped more than a cent and bonds rose as investors pared bets on higher ECB interest rates. The bank is concerned that the fastest inflation in 16 years is helping unions push through demands for higher wages at companies such as Deutsche Lufthansa AG, fueling further price increases. At the same time, record energy costs and the stronger euro are strangling growth. The Bank of England today also kept rates unchanged.
Euro-region economic confidence dropped the most since the Sept. 11 terrorist attacks in July and Europe's manufacturing and service industries contracted for a second month.
“The ECB is acknowledging the economic slowdown,'' said Matthew Sharratt, an economist at Bank of America in London. “They're still focused on high inflation but the best way to avoid a policy mistake would be to keep interest rates on hold.''
The euro fell as low as $1.5335, a seven-week low. The yield on the 10-year German government bond fell 9 basis points to 4.25 percent, the lowest since May 23. Bond yields move inversely to prices.
Cuts By Christmas?
Eonia swap contracts, a widely used market gauge of interest- rate expectations, have started to price in rate cuts. The yield on the April contract dropped 15 basis points to 4.16 percent after Trichet's remarks.
“If he was trying to give a neutral, balanced `don't price in rate cuts' speech, then I think he really screwed it up,'' said James Nixon, an economist at Societe Generale SA in London. “The market will be looking for cuts as early as Christmas at this rate.''
Oil prices have retreated 18 percent since reaching a record $147.27 a barrel on July 11 and money-supply growth, which the ECB uses as an indicator of future inflation, slowed more than economists forecast in June.
“Slowly but surely, the arguments for another interest-rate hike are running out,'' said David Milleker, chief economist at Union Investment GmbH in Frankfurt online cash advance http://pay-day-home.com.
`No Bias'
Trichet said the ECB has “no bias'' on interest rates. He removed a reference from his introductory statement to “moderate, ongoing growth,'' and said the bank will have a better idea of the economic outlook when it gets new staff forecasts in September.
In June, ECB staff projected growth would slow to about 1.8 percent this year and 1.5 percent in 2009. The economy expanded 2.7 percent in 2007.
Credit Suisse Group today cut its forecast for euro-area growth to 1.3 percent in 2008 and 0.8 percent in 2009 from 1.8 percent and 1 percent respectively.
Societe Generale economists estimate gross domestic product shrank 0.5 percent in the second quarter after growing 0.7 percent in the first. By contrast, the U.S. economy expanded 0.5 percent in the three months through June. The Federal Reserve this week left its key rate at 2 percent.
Still, inflation in the 15-nation euro region accelerated to 4.1 percent in July as oil prices soared to a record. The ECB aims to keep the rate just below 2 percent, something it has failed to do every year since 1999.
`Strong Concern'
“The information that has become available since our previous meeting has further underpinned our decision to increase rates in July,'' Trichet said. The ECB will “always do what is needed to deliver price stability.''
The bank raised its benchmark rate by a quarter point on July 3, citing its concern that a wage-price spiral may develop.
Negotiated wages in Germany, Europe's largest economy jumped 3.5 percent in the year through April, the biggest gain in 12 years. In Italy, wage inflation accelerated to 3.6 percent in June. Lufthansa, Europe's second-largest airline, last week agreed to a 5.1 percent raise for ground workers and some cabin crew.
Inflation risks “remain clearly on the upside and have increased over the past few months,'' Trichet said. “There is very strong concern that price and wage-setting behavior could add to inflationary pressure.''
ECB policy makers are “very worried about the risk of a wage-price spiral,'' said Martin van Vliet, an economist at ING Group in Amsterdam. “They've left the door open for a rate hike this year, but I think the chances of that have diminished to below 50 percent.''
Factory orders in the U.S. increased more than forecast in June, propelled by gains in petroleum and chemicals that reflected soaring prices.
The 1.7 percent gain in bookings, the biggest this year, followed a revised 0.9 percent increase in May that was larger than previously estimated, the Commerce Department said today in Washington.
The jump in raw-material costs is hurting profits, causing businesses to limit spending on new equipment. Demand from overseas is helping factories withstand the slowdowns in corporate and consumer spending, giving the economy a lift as the effects of the tax rebates wane.
“These numbers are somewhat inflated by prices, maybe even outside of petroleum,'' said David Sloan, senior economist at 4Cast Inc. in New York. “The underlying picture is fairly flat'' for manufacturing.
Economists forecast factory orders for June would rise 0.7 percent after a previously reported 0.6 percent gain for May, according to the median of 56 forecasts in a Bloomberg News survey. Estimates ranged from a 0.2 percent drop to an increase of 2 percent.
The biggest increase in prices in almost three years eroded consumers' buying power in June, diminishing the boost from the government's tax rebates, a separate report from Commerce also showed. Consumer inflation climbed 0.8 percent, the most since September 2005, the Commerce Department said today in Washington. Spending increased 0.6 percent after a 0.8 percent gain in May.
Ex-Transportation
Excluding demand for transportation equipment, which tends to be volatile, factory orders increased 2.3 percent, the most since April.
Bookings for all durable goods climbed 0.8 percent in June. This figure makes up just over half of the total factory orders. Non-durable goods orders, including those for food, petroleum and chemicals, jumped 2.5 percent after a 1.7 percent gain in May. Demand at petroleum refineries increased 5.6 percent and rose 11 percent at makers of agricultural chemicals such as pesticides and fertilizers.
Factory inventories increased 1 percent, also led by petroleum products, and manufacturers had enough goods on hand to last 1.22 months at the current sales pace, down from 1.23 months in May.
A report last week showed manufacturing stagnated in July. The Institute for Supply Management's factory index fell to 50 from 50.2 in June. Fifty is the dividing line between expansion and contraction. The group's factory orders index slumped to the lowest level in almost seven years and the prices paid measure remained near a 30-year high quick payday loans 24 hour payday advances.
`Significant Recession'
“Were it not for exports at this point, I think I would take the position that manufacturing overall would be in a significant recession,'' Norbert Ore, chairman of the ISM survey, said in a conference call. “But the export market has held up quite well for us.''
The trade deficit narrowed to a $395.2 billion annual pace in the second quarter, the smallest gap in seven years, the Commerce Department said on July 31. Without trade, the economy would have contracted at a 0.5 percent pace from April through June, instead of expanding at a 1.9 percent rate.
Bookings for capital goods excluding defense and aircraft, a proxy for future business investment, rose 1.2 percent in June, today's report showed. Shipments of such goods, which the government uses to calculate gross domestic product, increased 0.7 percent.
Slowing Sales
Akamai Technologies Inc., the largest supplier of software and services to speed up the delivery of Web pages, cut its profit forecast July 30 because of slowing sales. Chief Executive Officer Paul Sagan said the economy may be limiting clients' investments.
Private non-residential investment rose at a 2.3 percent annual rate in the second quarter, the slowest pace since the last three months of 2006, the government said last week. Spending on equipment and software fell at a 3.4 percent pace.
The Federal Reserve said on July 23 that “many'' of its 12 districts had declining manufacturing activity in June and July “although demand for exports remained generally high.'' The Fed also said the economy “slowed somewhat'' and that all of its bank districts reported “elevated or increasing'' price pressures.
The Fed is scheduled to next vote on the direction of its benchmark overnight lending rate between banks at the conclusion of its Federal Open Market Committee meeting Aug. 5. Traders are projecting the central bank will keep the rate at 2 percent.
Reports suggest automobile manufacturing will continue to suffer. U.S. auto sales fell to a seasonally adjusted 15-year low of 12.5 million at an annual rate in July, according to Bloomberg data.
Manufacturing in the U.S. stagnated in July as orders slumped to the lowest level in almost seven years, signaling higher raw material costs and slower spending are hurting producers.
The Institute for Supply Management's factory index fell to 50, a higher reading than forecast, from 50.2 in June, the Tempe, Arizona-based group said today. A reading of 50 is the dividing line between expansion and contraction.
Manufacturers are scaling back to protect profits and prevent inventories from growing as demand weakens. The drop in the value of the dollar has made U.S. goods more affordable overseas, leading to gains in exports that are keeping factories from sinking.
“The economy is essentially stalled,'' David Resler, chief economist at Nomura Securities International Inc. in New York, said in a Bloomberg Television interview. “It will remain that way for the time being. We will see bigger job losses down the road.''
Economists forecast the index would decrease to 49 from 50.2 in June, according to the median of 75 projections in a Bloomberg News survey. Estimates ranged from 47.8 to 52.5.
A separate report from the Labor Department today showed U.S. employers cut jobs in July for a seventh consecutive month. Payrolls fell by 51,000, less than forecast, and the jobless rate increased to 5.7 percent, the highest level in four years.
The purchasing managers' gauge of new orders for factories decreased to 45, the lowest level since October 2001, from 49.6. The production measure rose to 52.9 from 51.5.
Exports Cool
A shrinking trade deficit has helped some companies withstand slower U.S. sales. Still, the ISM report showed exports, while still growing, are starting to cool. The group's export measure fell to 54 from 58.5 in June.
“Were it not for exports at this point, I think I would take the position that manufacturing, overall, would be in a significant recession,'' Norbert Ore, chairman of the ISM survey, said on a conference call. “But the export market has held up quite well for us.''
The trade gap narrowed to a $395.2 billion annual pace in the second quarter, the smallest in seven years, the Commerce Department said yesterday. The reduction added 2.4 percentage points to growth, the most since 1980.
The employment index increased to 51.9 from 43.7 in June credit reports http://payday-badcredit.com. BorgWarner Inc., the world's biggest maker of automatic- transmission parts, said yesterday it will cut 1,000 jobs in North America because of declining auto production in the region.
The Auburn Hills, Michigan-based company also said that second-quarter profits rose to $87.5 million, bolstered by overseas demand.
Europe, Asia
“In Europe and Asia, our businesses are expected to experience sustained growth,'' Chief Executive Officer Tim Manganello said in a statement. “In North America, our operations will remain focused on fuel efficiency and cost management.''
Today's jobs report showed manufacturers cut 35,000 workers from payrolls.
Auto-industry figures today showed purchases of car and light trucks in the U.S. fell to a 12.5 million annual rate in July, the lowest level since March 1993. Separately, General Motors Corp. reported a second-quarter loss of $15.5 billion, its fourth consecutive quarterly decline.
The purchasing managers' index of prices paid fell to 88.5 last month from a three-decade high of 91.5 in June. Economists surveyed by Bloomberg News forecast the gauge would decrease to 88.
Costs Rising
“In North America, our input costs are going up faster than our prices,'' John Faraci, chief executive officer of International Paper Co. in Memphis, Tennessee, said yesterday in a Bloomberg Television interview. “Inflation's a real issue.''
U.S. consumers also face inflation concerns. Prices surged 5 percent in the past year, the biggest jump since 1991, the Labor Department said July 16. The increase was led by surging expenses for food and fuel.
A gauge of supplier deliveries was unchanged at 55.1. The inventory index dropped to 45 from 51.2, and the group's measure of order backlogs decreased to 43, from 47.5.
Even with the challenges, manufacturing is faring better than during prior recessions. While the Institute's manufacturing index fell to a five-year low of 48.3 in February, it was still well above the 42.1 reading reached in February 2001, a month before the start of the 2001 recession.
The U.S. probably lost jobs in July for a seventh consecutive month and the unemployment rate rose, increasing the risk the economic slowdown will worsen, economists said before a government report today.
Payrolls fell by 75,000 after a 62,000 decline in June, according to the median estimate of 80 economists surveyed by Bloomberg News. The jobless rate probably rose to 5.6 percent, the highest level in four years, according to the survey median.
Fewer jobs, combined with decreasing property values, stricter lending rules and near-record energy prices, would further undermine the ability of Americans to spend. Cutbacks at UAL Corp. and Starbucks Corp. signal firings are spreading beyond builders and manufacturers as the cost of raw materials soars.
“We'll see accelerated declines in payrolls,'' said Lindsey Piegza, an economic analyst at FTN Financial in New York. “That will really compound the pressure on the consumer.''
The Labor Department's employment report is due at 8:30 a.m. in Washington. Payroll estimates in the Bloomberg survey ranged from a decline of 150,000 to no change. The jobless rate is forecast to rise from 5.5 percent in June.
A private report today may show manufacturing shrank in July for the sixth time in eight months. The Institute for Supply Management's factory index fell to 49 from 50.2 in June, according to the Bloomberg survey median. A reading of 50 divides growth from contraction.
The payrolls report is projected to show a 40,000 decline in factory jobs.
Recession Signal
The employment figures may reinforce concern that the economy is in a recession. The July cuts would bring the total drop in payrolls so far this year to more than half a million.
The National Bureau of Economic Research, the official arbiter of U.S how to get a free credit report easy payday loans. contractions, tracks payrolls, sales, incomes, production and gross domestic product in making the recession call. The group defines downturns as a “significant'' decrease in activity over a sustained period of time, and usually takes six to 18 months to make a determination.
The economy shrank at the end of 2007 and grew less than forecast in this year's second quarter, figures from the Commerce Department showed yesterday. Some economists said this indicated the U.S. slipped into a recession late last year. Investors pared bets the Federal Reserve will raise interest rates this year.
More Americans filed initial claims for unemployment benefits last week than at any time in more than five years, Labor reported yesterday. Consumer confidence surveys have indicated that Americans, growing more pessimistic about job prospects, may trim spending.
More Firings
Starbucks, the world's largest chain of coffee shops, this week said it'll cut another 1,000 jobs as sales slump. The Seattle-based company on July 1 announced plans to eliminate as many as 12,000 positions worldwide.
Automakers and airlines continue to shed jobs. General Motors Corp. may cut about 5,000 U.S. jobs by year-end, people familiar with the plan said this week. July announcements at carriers included 7,000 cuts at UAL's United Airlines, and 6,840 at American Airlines parent AMR Corp.
Sealed Air Corp., the maker of Bubble Wrap packaging, said this week it plans to eliminate 900 to 1,000 jobs globally after second-quarter profit fell because of rising costs to make plastics.
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