Italy: Italy edges out of recession in Q1
April 30, 2019
The Italian economy bounced back to growth in the first quarter of the year, after languishing in technical recession in the last two quarters of 2018. Italy’s GDP expanded 0.2% over the previous period in seasonally- and working-day adjusted terms in Q1, according to an advance estimate released by the National Statistics Office (ISTAT) on 30 April. The result contrasted a 0.1% contraction in Q4 2018 and marked the best reading in a year. Moreover, the reading surpassed analysts’ expectations of a softer 0.1% quarter-on-quarter increase. According to the accompanying press release, the rise in Q1 reflected growing production in the industrial, agricultural and services sectors. In annual terms, GDP grew a mediocre 0.1% in Q1, although this was still up from the fourth quarter’s flat reading.
Q1’s result benefited from two consecutive months of expansion in industrial production in January-February, as firms beefed up their warehouses. Moreover, March’s fall in unemployment likely gave consumer spending some breathing room. That said, the economic situation remains fragile. Consumer confidence declined to its lowest level in over one-and-a-half years in March. Furthermore, business confidence was considerably weaker in the first quarter than in Q4 2018, and credit barely grew, pointing to sluggish private-sector activity. On the demand side, preliminary data indicated that domestic demand made a negative contribution to growth, while external demand contributed positively to growth. More detailed national accounts data will be released on 31 May.
The economy is seen stagnating this year, chiefly due to anemic domestic demand. Consumer spending is expected to cool amid muted wage and productivity growth and as rigid hiring rules hinder job creation. Moreover, continued political instability, a less favorable tax regime, high interest rates and subdued credit growth will continue to stifle investment. On top of that, long-standing problems weigh on Italy’s outlook, including the second-highest public debt-to-GDP ratio in the European Union, a slow judicial system, high taxes and cumbersome bureaucracy. Of particular concern, the country’s huge public debt load coupled with undisciplined government spending could trigger renewed financial turbulence. FocusEconomics panelists project growth of 0.1% in 2019, which is down 0.1 percentage points from last month’s projection, and 0.6% in 2020.