Italy: Outlook Moderates, October 2018
Italy’s economic recovery moderated further in the second quarter, weighed on by a weak external sector and anemic consumer spending. This was despite the significant rebound in fixed investment, on the back of robust growth in transport equipment and rising housing investment. Monthly data for the third quarter, meanwhile, suggests the economy has shifted into a lower gear. In July industrial production contracted significantly, as was seen more broadly across the Eurozone, while in August economic sentiment cooled and the manufacturing sector neared stagnation. As for household spending, retail sales dropped in July and consumer sentiment dipped in August. Nevertheless, sentiment remains positive and, although the level of employment dropped, the unemployment rate fell to its lowest levels in over six years in July. This, coupled with the formation of a government in June, could have supported spending in Q3. However, ongoing 2019 budget negotiations within the government continue to worry investors; interest rates on Italian bonds remain extremely sensitive to government announcements concerning the future fiscal stance. • Next year, the pace of recovery will remain sluggish. Although credit growth is expected to strengthen thanks to improvements within the banking sector, expansion in demand will likely be modest, and employment growth will slow. A loose fiscal stance may also lead to a hike in interest rates as markets question the sustainability of Italy’s huge public debt, while political uncertainty is unlikely to dissipate due to the entrenched ideological differences within the governing coalition. Escalating trade tensions and potential financial instability could further darken the outlook. FocusEconomics panelists project growth of 1.2% in 2018 and 1.1% in 2019, down 0.1 percentage points from last month’s forecast. • Harmonized inflation eased to 1.6% in August from a 15-month high of 1.9% in July. FocusEconomics panelists expect inflation to average 1.3% in 2018 and 1.4% in 2019.
The recovery is set to continue this year, albeit at a slower pace. Fixed investment should continue to strengthen in the second half of the year. The unemployment rate ticked down to 10.4% in July, the lowest level since March 2012, which should bode well for household spending in H2. However, longstanding problems including the second-highest public debt-to-GDP ratio in the European Union, sluggish productivity growth, a slow judicial system, high taxes and cumbersome bureaucracy, continue to weigh on Italy’s outlook. Moreover, protracted domestic political instability and uncertainties surrounding the direction of the government’s economic policy are also substantial risks.