The Italian government has forecast the economy will shrink by 1.2% this year
Italy's economy shrank by 0.7 percent in the second quarter, increasing the pressure on Mario Monti's government to balance austerity with growth measures as the country wallows deep in recession.
The poor figures will spark greater concern over whether Premier Monti can bring Italy back from the debt crisis brink. While some observers slammed the disappointing figures, others said they were unlikely to spook investors.
"Unicredit had forecast a 0.5 percent contraction for the second quarter -- we expected a clearer slowing of the recession," Unicredit's Chiara Corsa said.
The eurozone's third largest economy picked up ever so slightly after an 0.8 percent contraction of Gross Domestic Product (GDP) in the first quarter but Tuesday's figures show the country is still struggling.
Compared with second quarter 2011, the economy contracted 2.5 percent, the national institute of statistics (ISTAT) said.
"We're in a serious contraction phase. Italy has tackled the crisis with austerity but has lagged on growth measures and so today's results were widely predictable," Giuliano Noci from Milan's business school said.
The continued slump is gloomy news for Italians, who have seen a series of austerity packages, tax hikes and reforms imposed on them by Monti and his technocrat government as they struggle to battle off the debt crisis.
The marginal improvement compared with the first quarter will do little to reassure economic watchers and financial markets who fear the country's vast debt leaves it open to contagion risks from other countries hit by the crisis.
While the government has forecast that the economy will shrink 1.2 percent this year, the Bank of Italy has predicted 2.0 percent and business association Confindustria fears a deeper 2.4 percent.
"The GDP figures have shown that the government's growth forecasts for the year are off (track). Investors are now looking for proof that Monti has the strength to go beyond austerity, to growth," Noci said.
Corsa also slammed the government's forecast as "far too optimistic."
"There's a great sense of uncertainty over just how much Italy's economy will contract this year. We've certainly revised our forecast down," she said.
Debt-laden Italy has been punished repeatedly by the markets, forced to pay borrowing costs which still hover around the 6.0 percent warning benchmark as investors keep the pressure on Monti's team.
Former eurocrat Monti has warned the rest of the eurozone that Italy must be allowed breathing space on the markets to have any chance of pulling away from the debt crisis brink and resisting contagion from its weaker neighbour Spain.