Italy: Economy contracts in Q4 amid renewed restrictions
In Q4, GDP fell 2.0% over the previous quarter in seasonally- and working-day adjusted terms. The result sharply contrasted Q3’s historic 16.0% quarter-on-quarter rebound and was broadly in line with market expectations of a 2.2% drop. The economy swung back into contraction as tighter restrictions were introduced in October-November and were further intensified over the Christmas period. Meanwhile, in annual terms, the economy shrank 6.6% in Q4, worsening from the 5.1% contraction recorded in Q3. Taking the year as a whole, GDP plunged a record 8.9% in 2020, contrasting 2019’s anemic 0.3% increase.
Q4’s reading reflected decreased output in all sectors—primary, industry and services—as lockdown measures weighed on business activity and consumer spending. On the demand side, preliminary data indicates that both domestic and external demand made negative contributions to growth. More detailed national accounts data will be released on 3 March.
Turning to this year, GDP should recover some of last year’s losses as the gradual easing of restrictions and rising inflows of EU funds unleash pent-up capital and consumer spending, and the reopening of economies abroad fuels external demand. That said, the pandemic has dealt a severe blow to Italy’s already-ailing economy and has led to a widening of the fiscal deficit and further accumulation of the mountainous stock of public debt, while also deteriorating banks’ balance sheets. EU recovery funds should reduce the likelihood of financial turmoil, although political instability and long-standing problems such as a cumbersome public sector, much-needed market-friendly reforms, high taxes and a sluggish judiciary all cloud the outlook for Italy’s economy.
Commenting on the outlook, Loredana Maria Federico, chief Italy economist at Unicredit, stated:
“In our baseline scenario, we assume that containment measures, based on different classifications at the regional level, will be maintained for most of 1Q21, followed by a gradual rollback process, probably assisted by improving weather conditions. This implies that activity in the most exposed service sectors will most likely not recover in the current quarter. […] We fear that firms will remain cautious about expanding production in the first few months of the year, at least until the vaccination process has become more established in Italy and Europe, leading to a more entrenched recovery in domestic and foreign (and in particular European) demand. Therefore, we expect real GDP to contract again in 1Q21, and, hence, Italy to face a further technical recession before a recovery begins in the spring, fueled by a progressive easing of restrictions and improving confidence amid prospects of the vaccine rollout. The speed of the recovery will depend on the progress of the vaccination process, which is still highly uncertain.”