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Eurozone Q1 GDP probably fell as much as Q4

ROME - Economic activity in the euro zone and in Italy probably continued to contract in the first quarter at around the same record rates seen in the last three months of 2008, Italy’s central bank said on Friday.

The Bank of Italy’s quarterly bulletin said Italian firms would continue to shed jobs and it remained unclear when the euro zone’s third largest economy would emerge from its worst post-war recession.

“Some signs can be glimpsed of a future reduction in the force of the recession ... though they are not sufficient to suggest a halt to the fall in activity,” the bulletin said. Data suggests that gross domestic product posted “a marked fall” in the first quarter, “of around the same size as seen in the last quarter of 2008”, the central bank said.

Italy’s 1.9 percent quarterly GDP drop between October and December alone was the steepest since 1975. The economy is expected to contract more than three percent this year after shrinking one percent in 2008, giving two consecutive years of recession for the first time since World War Two.

The euro zone, where GDP fell a record 1.6 percent at the end of last year, also seems likely to post a contraction of around the same size in the first quarter, the BOI said.

In Italy, companies’ order books are still falling and so are output expectations, the bulletin said.

It cited a survey of companies conducted by the BOI in conjunction with business daily Il Sole 24 Ore, which showed 88 percent of firms believe the economic situation has worsened in the first quarter compared with the last part of 2008.

Firms’ near term expectations remain negative, although less so than in recent quarters, and a third of companies canvassed expect to reduce staff in the next three months, mainly by not renewing temporary contracts.

More positively, the survey showed a slight reduction in the number of firms which said they had excessive inventory levels, the BOI said.

Inflation will continue to fall in Italy and the euro zone as a whole on lower commodity prices and weak demand, the bulletin said. But it also noted that most professional forecasters do not see the prospect of deflation, defined as “a generalised and lasting decline in consumer prices”.

Year-on-year inflation could fall below zero in the euro zone, but only briefly, during the summer, the bulletin said.