Italy industry output dives, dampening recovery hopes

By Gavin Jones

ROME (Reuters) - Italian industrial output was much weaker than expected in July, falling 1.1 percent and pouring cold water on hopes that the country might emerge from its longest post-war recession in the third quarter.

After moderately encouraging recent signs from business and consumer sentiment indicators, July's industrial output, which posted the steepest fall since November last year, was the first important piece of hard data relating to the third quarter.

"There were no one-off factors at play, output fell in every major sector except textiles and there is nothing here that gives any sign of recovery," said a spokesman at national statistics bureau ISTAT.

The data was far worse than even the lowest forecast in a Reuters survey of 18 analysts whose consensus estimate was for a rise of 0.3 percent.

Industrial production figures show a close correlation with gross domestic product in Italy.

The euro zone's third largest economy has been in recession since mid-2011 and this week second quarter GDP was revised down to show a 0.3 percent drop. The euro zone as a whole emerged from recession in the second quarter.

"It's not good, but I still think Italy should come out of recession by the end of the year," said Deutsche Bank economist Marco Stringa.

"The Italian economy is intrinsically fragile and so recovery prospects are weaker than in the rest of the euro zone," he added.

In the three months to July, output was down 0.5 percent from the previous three months.

The data is bad news for Enrico Letta's fragile coalition government, which has insisted in recent weeks that Italy is ready to follow the rest of the euro zone out of recession.

The government is expected to revise down its full-year forecast for GDP later this month to a fall of around 1.8 percent from its current projection of -1.3 percent, which is considered unrealistic by all independent forecasters.

Letta is struggling to keep his government afloat amid tensions over the legal problems of coalition ally Silvio Berlusconi and the political tensions are weighing on Italian borrowing costs.

ISTAT slightly revised down June's output data to show a 0.2 percent rise, originally reported at +0.3 percent.

On a work-day adjusted year-on-year basis, output in July was down 4.3 percent, compared to a 2.1 percent decline in June.

(Editing by Stephen Nisbet)