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Italy GDP Q4 2018

Italy: Economy falls into recession in Q4

Confirming the markets’ gloomiest predictions, Italy’s GDP contracted for the second consecutive quarter over the previous period in seasonally- and working-day adjusted terms in the last quarter of last year, according to an advance estimate released by the National Statistics Office (ISTAT) on 31 January. The result marked the worst reading since Q1 2013 and means the economy has thus entered a technical recession. Moreover, the reading came below analysts’ expectations of a softer 0.1% quarter-on-quarter drop. According to the accompanying press release, the contraction in Q4 reflected falling production in the industrial and agricultural sectors, while the services sector recorded a muted performance. In annual terms, GDP grew a mediocre 0.1% in Q4, down from the third quarter’s 0.6% expansion and the worst reading in more than four years. The fourth quarter’s result brings full-year growth for 2018 to 0.8%, half the pace at which the economy expanded in 2017.

Two consecutive months of contraction in industrial production in October-November, on the back of a cooling industrial sector in the EU; shrinking manufacturing activity; and a steady deterioration in business confidence throughout Q4 all point to falling private-sector activity. Moreover, weaker consumer confidence in the last two months of 2018, coupled with a sharp slowdown in employment gains in Q4 following the introduction of stricter recruitment rules by the new government, spell trouble for consumer spending. Economic activity also suffered from higher interest rates that resulted from the political clashes between the interventionist and spendthrift government and the European Commission, which were eventually albeit temporarily settled at the end of December. Furthermore, despite further reductions in the stock of non-performing loans recorded in the quarter, the pace of credit growth to firms remained modest and the health of the banking sector was again called into question by resurfacing capitalization problems of troubled lender Carige. On the demand side, preliminary data indicated that domestic demand made a negative contribution to growth, while external demand contributed positively to growth in the third quarter. More detailed national accounts data will be released on 1 March.

The economy is set to expand anemically this year owing to frail domestic demand. Slowing employment gains due to less flexible recruitment rules and muted productivity growth will restrain consumer spending, while higher interest rates, subdued credit growth and a less favorable tax regime will restrain business investment plans. Moreover, long-standing problems weigh on Italy’s outlook, 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. The unstable political situation and resurgence of financial turbulence, coupled with the country’s sizeable fiscal deficit and fragile banking system, also cloud the outlook. FocusEconomics panelists project growth of 0.7% in 2019, which is down 0.1 percentage points from last month’s projection, and 0.8% in 2020.

Italy GDP Forecast

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