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Italy GDP Q1 2023

Italy: GDP contracts faster than previously reported in Q2

The economy contracted in the second quarter, with GDP decreasing 0.4% quarter on quarter, coming in below a preliminary estimate of a 0.3% drop and swinging from the 0.6% expansion recorded in Q1. A negative contribution from domestic demand was behind the downturn.

On the domestic front, household spending flatlined in Q2, following the 0.8% expansion recorded in Q1, due to sticky inflation and tighter financing conditions. Meanwhile, fixed investment contracted 1.8% in Q2, swinging from Q1’s 0.4% increase, likely due to higher interest rates, the phasing out of tax incentives in the construction sector and delayed spending of EU recovery funds. Lastly, public spending fell 1.6% (Q1: +1.4%). Meanwhile, restocking added 0.3 percentage points to growth, compared to the null contribution recorded in Q1.

On the external front, exports of goods and services decreased 0.4% in the second quarter, which followed the first quarter’s 1.0% decrease, weighed down by feeble external demand, especially from Germany and China. Meanwhile, imports of goods and services fell 0.4% in Q2 (Q1: -0.3%). Overall, the external sector’s contribution to growth was null, which follows the 0.2 percentage point subtraction in Q1.

On an annual basis, economic growth decelerated to 0.4% in Q2, compared to the previous period’s 1.5% growth.

Following Q2’s release, our panelists are likely to revise their growth estimates downwards for 2023 as a whole. The economy should record tepid growth this year, restrained by depleted savings, still-high inflation and tighter financing conditions. EU funds disbursement, if timely, should counteract these drags somewhat. A high stock of public debt, coupled with a possible reignition of financial turbulence, poses a downside risk to the outlook.

Commenting on the economic outlook, Paolo Pizzoli, senior economist at ING, stated:

“We believe that a technical recession could still be avoided in Q3 2023. July business confidence data were a mixed bag, with another decline in manufacturing and improvements in services (tourism and transport) and construction (specialised works). We believe such a pattern is still compatible with a return to modest positive growth in the third quarter.”

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