News Analysis:Is lower production in Italy for January start of a trend, or a momentary blip?

Italian industrial production fell to a four-month low in the first month of 2016, figures released Monday show, though analysts said will take time to determine how much of an impact that will have on the country's fragile hopes for an economic recovery.

A month ago, things looked better for Italian economic growth prospects. Ever since the first signals of an economic recovery started trickling in early 2015, economists said it needed to watch manufacturing and job creation. When both got on track, it would be a good sign. And at the start of the year they both looked good: the jobless rate fell to 11.3 percent from 11.5 percent, its lowest rate in three years. And the Purchasing Managers' Index, or PMI -- a closely watched measure of industrial production reached a reading of 55.6, its highest level since 2011.

A month later, the economic picture is a little less rosy. "If Italy is indeed returning to steady economic growth, it will not be a smooth road," Oliviero Fiorini, an economic analyst with ABS Securities in Milan, said in an interview. "Even if the general tendency is positive, it may still be a process of taking two steps forward and one step back."

The latest data, compiled by the research group Markit, shows that Italy's PMI in January was 53.2. That is the lowest level in four months, but, more importantly, it is below the 54.8 reading economists expected.

The PMI is based on five major indicators: inventory levels, new orders, new production, deliveries, and employment levels in the sector. A reading above 50 represents an expansion; below 50 represents a contraction.

"The key will be to see what happens next "month, Fiorini said, noting the PMI for the European Union as a whole slowed in January, which may have been a factor in Italy's relative slowdown.

"The Eurozone's manufacturing economy missed a beat at the start of the year," Chris Williamson, Markit's chief economist, said in a statement. Markit showed that manufacturing growth slowed not only in Italy, but also in Germany and the Netherlands, and it was flat in France and Greece.

Williamson pointed to other worrying signs: "If the slowdown in business activity wasn't enough to worry policymakers, prices charged by producers fell at the fastest rate in a year," he said.

If prices start to trend downward, it could spark a round of deflationary fears. Italian economist Mario Draghi, president of the European Central Bank, or ECB, told the European Parliament Monday that if the ECB had not taken action last year, some Eurozone countries might already be suffering from deflation.

Deflation is when prices drop, which acts as a drag on spending and growth, pushing wages lower and making it more expensive for the government, companies, and individuals to pay off debt. It's early to speculate about deflation risks after one month of lower prices, but if manufacturing does not perk up in February and March, economists said it could start to become a risk again. Endit