Italy’s economy performed shockingly poorly in the second quarter, providing Prime Minister Giorgia Meloni with an uneasy outlook as her administration works to combat the damaging effects of high inflation, according to figures released on Monday.

According to the national statistics agency ISTAT, the gross domestic product (GDP) decreased by 0.3% on a quarterly basis between April and June while increasing by 0.6% annually. According to a Reuters analyst survey, the quarterly reading was flat and the annual increase was 0.9%.

The gloomy data contrasts with the expectations of the government, which in April set a growth target of 1% for 2023 and estimated a moderate GDP increase in the second quarter.

“Italy is no longer outperforming its peers and we think it will experience a sharper drop in output than other euro zone majors in the second half of 2023,” Franziska Palmas wrote in a report for Capital Economics.

The figures cast a shadow on the country’s banking sector, where the top two lenders – Intesa Sanpaolo (ISP.MI) and UniCredit (CRDI.MI) – last week posted much stronger than expected earnings helped also by low, or non existent in the latter’s case, provisions against loan losses.

ISTAT gave no numerical sector breakdown of its preliminary second-quarter GDP estimate, but said industry and agriculture output decreased whereas services grew marginally.

The 0.3% contraction left Italy with so-called “carryover” growth of 0.8% this year, assuming GDP would be flat in the remaining two quarters.

In recent weeks, the government has said the economy could grow by at least 1.2% this year, arguing that a positive trend in the service sector supported by booming tourism would be enough to offset a widely expected slowdown in manufacturing activities.

“Italy is an advanced industrial country and the weakness in industry is much more important than the tourism sector for the economy’s health,” said Lorenzo Codogno, head of LC Macro Advisors and former chief economist at Italy’s Treasury.

ISTAT also said annual inflation slowed to 6.4% in July from 6.7% in June, on a EU-harmonised consumer prices.

Annual growth in prices of food, household and personal care stood at 10.4%, broadly in line with that of the month before and over 50% higher than the overall index.

To help the poorest, the government hopes to announce this week a deal with supermarkets and producers to control prices of essential consumer goods in the final three months of the year.