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Italy's economy stagnant in Q3 due to manufacturing slowdown: Bank of Italy

A year over year slowdown in manufacturing looks set to drag down Italy's third-quarter GDP growth prospects, Banca D'Italia SpA said in an Oct. 18 economic bulletin.

Italy's central bank added that there is a risk of further deterioration in industrial activity negatively impacting other sectors, including services and construction, which have recently shown positive numbers.

External conditions are also expected to weigh on Italy's economic performance, the country's central bank noted. Trade tensions around the world, China's economic slowdown and uncertainties surrounding Brexit pose significant external risks.

"Greater uncertainty about the outlook for growth and the very accommodative stance adopted by the central banks have led to a sharp fall in long-term yields," Banca d'Italia said.

In Europe, the slowdown in Germany's industrial production has spread to other sectors and countries, while expectations of a decline in inflation may persist due to increasing unfavorable cyclical risks. The Governing Council of the ECB adopted expansionary fiscal measures with broad consensus to counter risks and the weak price outlook, according to Banca d'Italia.

However, surveys conducted by the Bank of Italy in September showed that companies were more willing to invest, encouraged by tax incentives which were reintroduced in April.

The Italian central bank also said the recently approved U.S. tariffs on EU products "will affect a relatively limited share of Italian exports" to the country, but it warned that "indirect effects could be significant." Italy posted a trade surplus of €3.68 billion in August.

Headline inflation is expected to be at 0.3% in the third quarter, while core inflation will be at 0.5%, Banca d'Italia added. The central bank's survey of firms indicates that they expect inflation to stay well below 2%.

Debt-to-GDP ratio is projected to increase to 135.7% of GDP by the end of 2019, with the government planning to push deficit spending to 2.2% of GDP this year, as part of its "slightly expansionary" fiscal policy stance.