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Italian economy stagnates as German growth slows

Italy's famed handmade goods failed to boost second quarter GDP growth Image copyright Getty Images

Italy's economy failed to grow between April and June as the country struggled with its creaking banking sector.

GDP growth shrank to 0% in the second quarter compared to 0.3% in the first quarter.

Germany's economy also slowed in the second quarter, albeit less markedly than had been expected.

Europe's largest economy expanded by 0.4%, down from 0.7% in the first quarter, but above forecasts of 0.2%.

Overall, a second estimate of GDP across the eurozone confirmed that growth halved to 0.3% from 0.6% in the first three months of the year.

GDP also fell across the 28-nation European Union to 0.4% from 0.5% between the first and second quarters.

Italian banks

In Italy, analysts had expected GDP to grow by between 0.1% and 0.3%.

Italian Prime Minister Mario Renzi, is battling to reduce the bad debt in its banking sector, which is currently buried under €360bn worth of bad loans. Monte dei Paschi di Siena, Italy's third largest bank and the world's oldest lender, is saddled with €46.9bn of bad debt.

Alberto Bagnai, economic policy professor at the University of Chieti-Pescara, said: "There is no way to solve the banking problem without economic growth. If the whole nation doesn't start earning more it can't pay back its debts - public or private."

The government expects the country to grow by 1.2% this year. However, the International Monetary Fund recently reduced its economic growth from 1.1% to 1%.

The new data means that growth in the Eurozone's three biggest economies - Germany, France and Italy - has either slowed or completely stalled between the first and second quarters.

France recorded no growth between April and June after GDP rose by 0.7% in the first quarter, boosted by business from the Euro 2016 football tournament.

Image copyright Getty Images
Image caption Greece's economy is benefitting from more tourism

In contrast, Greece reported a rare rise in GDP - which increased by 0.3% compared to a 0.1% fall in the first quarter. Holidaymakers are choosing the likes of Greece and Spain over politically volatile Turkey.

Nikos Magginas, an economist at National Bank of Greece, said: "Domestic demand was probably better than expected because of tourism. The numbers point to a positive turnaround in the economy in the second half of the year."

Europe's engine room

In Germany, exports and consumer spending were stronger than forecast but investment in construction and machinery slowed.

Commenting on "Europe's engine room", Carsten Brzeski, economist at ING-DiBa, warned that Germany must increase investment to support growth.

However, he said it could be hampered by ``increased uncertainties after the Brexit vote, continued structural weaknesses in many eurozone countries and a renewed global slowdown''.

Image copyright Getty Images
Image caption Germany reduced investment in equipment and construction in the second quarter

Joerg Zeuner, economist at KfW, said: "The decision to leave the EU will hit the British economy, and the slowdown will spread to Germany through muted exports.

"The UK is an important market, especially for German car makers, but also for our chemical and pharmaceutical industries."

New data also revealed that German inflation rose in July, up by 0.4%, fuelled by rising food and services prices.

Inflation was tempered by the falling cost of energy and clothing. Destatis, Germany's statistics office, said stripping out energy, inflation would have been 1.3% in July.

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