Italian contraction sets eurozone alarm bells ringing

MILAN, August 10, 2008 (AFP) – The Italian economy contracted in the second quarter, official data showed, adding to a deepening sense of gloom about the eurozone economy amid a flurry of bad news for the 15-nation bloc. Italy is the first eurozone country to reveal figures for the second quarter and a 0.3-percent quarter-on-quarter contraction underlines fears that a severe slowdown, even a broad European recession, could be looming.

European Central Bank president Jean-Claude Trichet, announcing unchanged interest rates on Thursday, recognised evidence of weakening of the eurozone economy in comments which sent the euro into a tailspin.

“These are the first GDP figures to come out and they anticipate a general setback in Europe,” said an analyst at French investment bank BNP Paribas, Caroline Newhouse-Cohen, commenting on the Italian figures.

“Even if Italy is suffering from a more unfavourable situation than Germany or France, we have every chance of seeing a contraction of about 0.3 percent or more, in the whole of the eurozone.”

She added: “Even the German GDP, expected next week, is likely to show a fall of 0.8 percent.”

A recession is defined as two consecutive quarters or more of economic