In yet another data release highlighting weakness in the Eurozone economy, the Q3 GDP reading for Italy came in below expectations, contracting 0.1% on the quarter vs. an expected unchanged reading, and printing 0.7% on the year vs. an expected 0.8% reading.
Disappointingly for both the Italian and Eurozone economy, this contraction marks the first quarterly contraction in 14 quarters. The breakdown of the data is the real cause for concern, highlighting weakness in the demand.
Indeed, the single biggest driver of growth in the quarter was net exports (which contributed 0.1%) while domestic demand minus inventories declined 0.3%, mostly the fault of private investment which was down -0.2%.
In light of recent weakness in manufacturing data and amidst concerns over future fiscal policy, a soft private investment figure is not a huge surprise. However, private consumption was also disappointingly weak.
Weak Q4 Outlook
Looking ahead to Q4 there is little to suggest a rebound. Business confidence has been falling over both October and November, especially in the services sector, and the widening of the BTP-Bund spread (now around the 300 basis point mark) will likely translate into weaker lending activity and weaker investment activity.
This latest data is likely to put pressure on the Italian government over the ongoing budget debate. At the core of the government’s plans to increase spending was its assumption of higher Italian growth in coming quarters, a view which will be hard to defend now.
As such, it is now increasingly likely that the Italian government will be forced to scale down its deficit target and focus more on balancing its budget in an amended budget proposal.
EURUSD continues to trade within the large falling wedge pattern which has framed price action over the last six months. Price is currently underpinned by support at the 1.1298 level which, while intact, suggests the potential for a reversal higher. Below this level, the next key support is down 1.0912.