The Italian economy unexpectedly shrank in Q2 when the government attempted to reduce debt and boost prosperity.

GDP contracted by 0.3% between April and June compared to the first three months of the year, surpassing the zero growth figure forecast by Bloomberg analysts and in contrast to overall growth in the euro region. 

According to statistics officials, the contraction is due to a fall in domestic demand, whilst next exports didn’t contribute to growth. Furthermore, industry and agriculture were especially hard hit, Bloomberg reports.

These latest statistics reveal how activity within Italy’s economy – the third largest in the eurozone – is beginning to feel the impact of increasing interest rates, reduced fiscal support and weaker global export demand. Indeed, in Q1, GDP rose 0.6%.

Prime Minister Giorgia Meloni last week said Italy’s economic policies were fuelling faster growth than France and Germany. According to the International Monetary Fund, Italy’s GDP will rise by 1.1% in 2023.

Furthermore, last month Finance Minister Giancarlo Giorgetti said the Italian economy could reach growth of 1.4% this year, bolstered by a surge in tourism.

This could boost the country in the second half of the year, yet the global manufacturing slowdown is weighing on the economy. In June, factories in Italy endured their worst month since the initial pandemic lockdowns in 2020, according to a recent survey of purchasing managers. Figures for July are due to be published on Tuesday.

“The contraction provides further evidence that the European Central Bank’s monetary tightening is biting. We think activity will remain lacklustre for the remainder of the year,” said Bloomberg senior euro-area economist David Powell.