Italian economy contracts 0.7% in second quarter

image captionAusterity measures have deepened Italy's recession

Italy's economy shrank 0.7% in the second quarter, underlining a deepening recession, as government austerity measures continue to affect everything from factory activity to consumer spending.

Italy's GDP fell for the fourth quarter in a row, preliminary figures showed.

Compared with a year earlier, growth slumped by 2.5%, Istat said.

GDP fell by 0.8% in the first quarter compared with the final three months of 2011, the statistical agency said.

Earlier, data showed that factory output in June slumped 1.4% compared to May and 8.2% year on year.

"The austerity measures are obviously weighing on the economy," said Vincenzo Bova of MPS Capital Services. "Investments and consumption, both private and public, are the hardest-hit areas," he added.

Prime Minister Mario Monti's government is implementing a series of austerity measures worth 20bn euros (£15.8bn) as it grapples with rising borrowing costs, driven by market fears over the widening eurozone sovereign debt crisis.

But investors are worried Italy - the eurozone's third biggest economy - may be next in line to suffer the same ordeals that have hit Greece, Portugal and now Spain.

'No sign of change' from recession

Italy's government has the biggest debt burden of any of the major eurozone countries at 123% of GDP, which makes it particularly susceptible to a loss of market confidence - something that would make it impossible for the government to roll over its debts as they come due for payment.

Despite the austerity measures investors have continued to dump Italian sovereign bonds, which have pushed their yields close to unsustainable levels as markets fear a breakdown of the euro.

Italian business confidence fell last month, as company executives are increasingly pessimistic over the country's economic prospects and expect the recession to worsen in coming months.

Employers' lobby group Confindustria predicts that the economy will shrink 2.4% this year, with unemployment hovering around 11%. The government's forecasts the economy to contract by 1.2%.

"There is no sign of any change of trend for Italy," said Annamaria Grimaldi, an analyst at Intesa Sanpaolo.

Mr Monti has been trying to persuade other European leaders to give Italy some breathing space to allow its economy to grow, rather than sticking to tight fiscal targets that have contributed to the recession's deepening.

In an interview with Der Spiegel at the weekend, Mr Monti said: "If everything goes according to plan, I will remain in office until April 2013, and I hope that I can rescue Italy from financial ruin by then - and this with moral support from a few European friends, led by Germany. But I will also say very clearly: moral support, not financial."

Germany and other countries "should allow a bit more leeway to those states in the euro zone that follow European guidelines the most closely", he added.

But Mr Monti has struggled to rebuild public confidence in his leadership back home, where his popularity has plunged from record levels since he took office last year. In fact, there is mounting speculation that his predecessor Silvio Berlusconi may be making a comeback.