ROME: Italy’s economy may be slightly less sickly than previously thought, data suggested on Tuesday, as gross domestic product posted a smaller drop than expected at the end of last year and the service sector returned to growth in February.

The euro zone’s third largest economy contracted by 0.1 per cent in the fourth quarter, national statistics bureau ISTAT reported, compared with its earlier estimate of a 0.2 per cent fall.

That followed an identical 0.1 per cent drop in the third quarter, confirming Italy is in what analysts call a technical recession, defined as two straight quarters of declining GDP.

However, the breakdown of components for the fourth quarter showed the drop in output was due to a sharp inventory reduction, while most other components of domestic and foreign demand expanded.

“The data is a bit better than expected not only because of the upward revision to the fourth quarter but because the components are also better,” said Intesa Sanpaolo economist Paolo Mameli.

A fall in inventories is sometimes seen as a positive sign for future growth because it means firms will have to increase output to meet future demand. On the other hand it may be a sign that they expect demand to languish.

The inventory draw-down subtracted a hefty 0.4 percentage points from quarterly growth, outweighing smaller positive contributions from consumer spending, investments and exports.

Most monthly indicators have remained weak at the start of this year, but Italian bonds rallied on Tuesday after a survey of the services sector was stronger than expected, showing a return to marginal growth after contraction the month before.

The IHS Markit Business Activity Index for services rose to 50.4 in February from 49.7 in January, climbing above the 50 mark that separates growth from contraction. A Reuters survey of 14 analysts had forecast 49.4.

Mameli said after Tuesday’s GDP and services data he now saw a possibility that GDP would not post a third consecutive contraction in the first quarter, as previously expected.

The coalition of the anti-establishment 5-Star Movement and the right-wing League which took office in June last year is forecasting 2019 expansion of 1.0 per cent. However, most economists expect growth to be no more than half that rate, and some are forecasting a full-year contraction.

In 2018 full-year growth, calculated according to the EU-wide procedure which does not adjust for the number of days worked, came in at 0.9 per cent, ISTAT said.

The slump at the end of 2018 produced a negative carry-over effect of -0.1 per cent for this year, meaning if GDP were to be flat quarter-on-quarter in all four quarters of this year, the economy would contract by 0.1 per cent over the whole year.

At the end of 2017 the carry-over for 2018 stood at +0.5 per cent.