Italian Economy Unexpectedly Stalls in Setback for Populists By Bloomberg

© Bloomberg. Souvenir magnets of Rome and Italy sit displayed for sale at a tourist stall in Rome, Italy, on Thursday, Aug. 17, 2017. Italy

© Bloomberg. Souvenir magnets of Rome and Italy sit displayed for sale at a tourist stall in Rome, Italy, on Thursday, Aug. 17, 2017. Italy’s economic recovery extended for a tenth straight quarter, boosting optimism that growth can become sustainable this year amid a rise in industrial production. Photographer: Alessia Pierdomenico/Bloomberg

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(Bloomberg) — Italy’s economy stalled for the first time in almost four years, putting pressure on the populist government’s ambitious spending plans.

The stagnation in the third quarter followed growth of 0.2 percent in the previous three months and it leaves Italy as the underperformer among the euro area’s major economies. Average growth across the region was probably 0.4 percent in the three months through September.

Italian bonds fell on the news, with yields climbing across the board. The yield on two-year notes rose seven basis points to 1 percent. The moves come ahead of an auction where the Treasury will sell five- and 10-year bonds.

Statistics agency Istat in its preliminary report cited a contraction in industrial sectors for the weak performance. The median estimate in a Bloomberg survey was for expansion of 0.2 percent.

Italy’s government is looking for a major boost from its economic program, aiming to increase employment while letting thousands of workers retire earlier. However, the plan includes letting the deficit widen to 2.4 percent of output next year and has run into a firm “no” from the European Union.

The weakness is “mainly due to the decrease in the industrial activity which was harmed by the slowdown in global trade,” said Loredana Federico, chief Italian economist at UniCredit, who had predicted 0.1 percent growth. She added that uncertainty over the outlook “weighed on corporate investments.”

Investors have also reacted negatively to the fiscal program, pushing bond yields higher, and Italy has been slapped with a credit rating downgrade by Moody’s Investors Service.

S&P kept its rating on Italy unchanged last week, though it lowered its outlook. The rating company projects that the economy will expand about 1.1 percent this year and next, supported by domestic demand. But that’s down from a previous forecast of 1.4 percent.

Confindustria, the country’s main employers’ lobby, said last week that the government’s 2019 growth target of 1.5 percent “seems very improbable.”

(Upates with markets in third paragraph.)

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