by Tamsin Smith Bologna, Italy

Italy is the eurozone's third biggest economy but next to Germany has recorded the lowest economic growth since 1999.

With consumer confidence and economic growth at rock bottom, the Italians are now having to tighten their belts.

The euro has led Italians to believe inflation is higher than it is

Bologna's central square is impressive for its imposing red brick medieval buildings but also for its visible wealth - designer shops nestle in between each archway of the colonnades.

>Even the food here is rich - if its not made with butter and cream then you won't find it on the menu. This is the heartland of industrial northern Italy.

Bologna's fortunes have been made by the regions light engineering and hi-tech industries. But today these companies are in serious trouble.

"This is not a good moment for us Italians or for any business in the eurozone."

Stefano Parisi, director general of Confindustria, the Italian federation of industries, says the strong rate of the euro means Italian companies, like many French and German counterparts, just can not export enough be competitive

"In Italy this is even worse, we have a tradition of small and medium-sized companies which rely on heavy exportation, but now we suffer competition with China."

Corporate nightmare

Down the road at Bologna's annual engineering trade fair, there are slick video promotions and marketing gimmicks on every stand.

We have other problems here in Italy, excessive bureaucracy and terrible infrastructure. I'm losing sleep over the situation Giorgio Squinzi, director of ceramic flooring firm Mapei

"I cannot be very optimistic about the future," says Giorgio Squinzi, managing director of Mapei which makes and exports ceramic flooring.

He blames the strong euro for export problems, but says other home-grown factors make life for Italian companies even more painful.

"We have other problems here in Italy, excessive bureaucracy and terrible infrastructure. I'm losing sleep over the situation. I'm worried, very worried, we have no growth."

Inflated fears

If the European economy picks up, especially in Germany which is a key export market for Italian companies this could be enough to lift Italy out of the doldrums.

I'm a pensioner and I'm now counting my money right at the end of the month Maria, aged 72

But there is another problem - inflation. Pick up any Italian paper on any day and you will read tales of consumer woes, how some vegetables are 90% more expensive than last year, how the price of a cappuccino has doubled.

Paolo Leon from Rome university, one of Italy's leading economists, says that although inflation in Italy is relatively high at 2.8%, people feel it to be much higher due to price increases when the euro was introduced.

"Perceived inflation is at 6% and for families this means you buy much less because your income isn't sufficient and your salary isn't rising in line."

The result is that the label conscious Italians simply are not spending - a recent survey says more people shop in out of town discount stores than every before.

At a supermarket on the outskirts of Bologna there is no Barilla pasta, or Parmelat fruit juice. The packaging is white and the prices are low.

We expect to see unemployment rise in the next month Paolo Leon, Rome University

Shoppers here feel inflation has made their lives more difficult.

"I'm a pensioner and I'm now counting my money right at the end of the month. I've never had to do that before," said Maria, aged 72.

"We spend so much on groceries, we can't afford things like trips to the cinema now," said another shopper, Giovanna, aged 38.

Gloomy Forecasts

Economists like Paolo Leon now worry that on top of low growth, and a drop in exports, the freefall in consumer spending is seriously bad news.

"All companies producing consumer goods will now produce less, unit costs will increase, and many companies will go bust, we expect to see unemployment rise in the next month."

Italy may not technically be in recession, but projections that the economy will only grow 0.5% over the next quarter make gloomy reading.