It's official: Italy's economy has slipped into recession

• Output in Italy, Europe's fourth-largest economy, contracted by 0.2% in the fourth quarter, on the heels of a 0.1% drop in the quarter before that, the Italian National Institute of Statistics, known as Istat, said on Thursday.
• That means Italy is officially in a recession, defined as two successive quarters of economic contraction.
• Istat cited a "decrease of value added in agriculture, forestry and fishing as well as in industry and a substantial stability in services."
• It's not just Italy — industrial production throughout the eurozone slumped at the end of 2018.

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It's official: Italy is in a recession.

Output in Europe's fourth-largest economy contracted by 0.2% in the fourth quarter, on the heels of a 0.1% drop in the quarter before that, the Italian National Institute of Statistics, known as Istat, said on Thursday. A recession is defined as two consecutive quarters of negative growth.

While the decline was bigger than expected, analysts had been expecting a recession after a slew of data indicated the fundamentals of the Italian economy continue to struggle.

Read more: We now have conclusive proof that Europe is in an economic slump, and that two of its biggest economies are careering towards recession

Istat cited a "decrease of value added in agriculture, forestry and fishing as well as in industry and a substantial stability in services," adding that "from the demand side, there is a negative contribution by the domestic component (gross of change in inventories) and a positive one by the net export component."

Manufacturing was a warning sign

Italy's manufacturing sector has bombed out in recent months, with surveys and official data showing a continued contraction at the end of 2018.

Andrew Harker, an associate director at IHS Markit, which compiles the Purchasing Managers' Index, said on January 2 that the manufacturing slump was a "worrying end to the year for Italian manufacturers, with firms continuing to struggle to secure new business."

"This is in marked contrast to the start of 2018, when the sector was experiencing strong growth," he added. "With business confidence at a six-year low, there appears little sense of optimism that the current soft patch will come to an end in the near future."

While the budget crisis that gripped Italy in the second half of 2018 seems to finally have a solution, the country's government is volatile and highly euroskeptic, so it could be teetering on the edge of yet another political crisis.

And it's not just Italy.

Industrial production throughout the eurozone slumped at the end of 2018, signaling that the single-currency area's economy is still growing but at a glacial pace. Eurostat, the European Union's statistical authority, said in early January that industrial production fell by 1.7% from October to November.