The Italian economy is now in recession according to the Organisation for Economic Cooperation and Development. In its twice-yearly economic outlook, the OECD forecast that Italian GDP would contract by 0.6 per cent in 2005, bouncing back slightly by 1.1 per cent in 2006. It blames flat productivity growth since 2001 for the downward trend, at least in part the result of a steady increase in the cost of labour. The lack of productivity gains, combined with high oil prices and a strong euro, have hit exports particularly badly. The poor economic showing will also hit public finances badly. The Italian budget deficit is expected to reach 4.4 per cent of GDP, up considerably from the 3.1 per cent forecast at the beginning of 2005. The deficit could rise to five per cent next year, making it even more difficult to reduce Italys public debt, which equalled 106 per cent of GDP in 2004. The news comes just days after Italy was named and shamed by the European Commission for breaching the Eurozone budget deficit restriction of three per cent of GDP in 2003 and 2004.
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