2012.05.28 13:32:02 UPDATE: Italy May Business Confidence Falls More Than Expected

(Updates throughout with forecast changes, bond prices, context.) By Christopher Emsden and Liam Moloney Of DOW JONES NEWSWIRES ROME (Dow Jones)--Italian business confidence fell more than expected in May, hitting its lowest level since August 2009 as tax increases took their toll on domestic orders, national statistics institute Istat said Monday. And there is little hope for a fiscal easing in the near term, as Prime Minister Mario Monti has pledged to balance the budget next year. If anything, the mood might even gloomier, because some tax increases, on properties and on sales, have yet to kick in. Istat said Italy's manufacturing business confidence index fell to 86.2 from 89.1 in April, below a consensus forecast of 88.7. No industry or region was spared. "Economic gloom continues to envelop Italy," said Raj Badiani, principal economist at IHS Global Insight. "Given the relentless pounding from the tougher austerity regime, tighter credit conditions and rising unemployment, the downturn is expected to linger through the year." Italy's economy has been contracting since last summer, when government borrowing costs began to shoot up. Yields on Italian 10-year bonds rose Monday to 5.69% from 5.56% Friday and 4.56% a year ago. By comparison, yields on equivalent German bunds declined to 1.38% from 3.06% a year ago. The 431-basis-point spread or interest-rate gap between Germany and Italy, the two countries with the largest manufacturing industries in the euro zone, is almost three times wider today than a year ago. That has all but shut down credit growth in Italy. Istat's survey signaled sharp drops in the outlook for domestic orders, a small but new decline in the outlook for foreign orders, and a big decline in the amount of hours worked in the industrial sector. The tourist industry suffered a very sharp drop of confidence on the eve of the big summer season. The pessimism, which comes on top of a 16-year low in Italy's May consumer confidence index, will likely squelch employment and investment decisions until the fall. Both Deutsche Bank and JPMorgan on Monday cut their 2012 forecasts for Italy's economy, and both now expect a contraction of more than 2% this year, with further compression in 2013. The government's fiscal projections are based on a more modest contraction of 0.5% this year and a return to growth in 2013. Monti, who took the helm of a technocrat government in November, has vowed not to tighten Italy's budget policy further. -By Christopher Emsden and Liam Moloney, Dow Jones Newswires, +39 06 6976 6920; chris.emsden@dowjones.com (END) Dow Jones Newswires May 28, 2012 07:32 ET (11:32 GMT)