Italy: Italy's economy decelerates in Q2 on weak external demand
August 31, 2018
The Italian economy slowed to a two-year low in the second quarter on a weak external sector. A second estimate released by the National Statistics Office (ISTAT) on 31 August confirmed GDP growth of 0.2% in the second quarter over the previous quarter in seasonally- and working-day adjusted terms, below the 0.3% expansion in the previous quarter. GDP expanded 1.2% in Q2 compared to the same quarter of the previous year (Q1 2018: +1.4% year-on-year).
The domestic economy showed resilience in Q2, despite weaker private consumption growth which expanded 0.1% over the previous quarter, down from the 0.4% print recorded in Q1. Consumer spending was relatively weak despite sustained improvements in the labor market. Meanwhile, government consumption ticked up to 0.1% in Q2, above the flat print recorded in Q1, signaling the government could be relaxing slightly on public spending controls. Gross fixed investment rebounded 2.9% in the quarter, contrasting Q1’s 1.4% contraction. The recovery was chiefly driven by strong growth in machinery and equipment investment, particularly for transport equipment. Meanwhile, housing investment also strengthened in the quarter. All told, the contribution to growth from domestic demand excluding stocks was 0.6 percentage points in Q2, following a flat reading in Q1.
Quarter-on-quarter growth in Q2 was also underpinned by a healthy increase in stocks. The highly volatile component of stock variation added significantly to growth. Restocking added 0.2 percentage points to the GDP expansion, down from the robust 0.7 percentage-point contribution to growth recorded in the previous quarter.
The external sector dragged on growth in the second quarter, subtracting 0.5 percentage points from the overall result. It followed the 0.4 percentage-point negative contribution recorded in Q1. Exports of goods and services fell 0.2% (Q1: -2.1% quarter-on-quarter), while the imports of goods and services recovered notably in tandem with the strengthening domestic demand (Q2: +1.8% qoq; Q1: -0.9% qoq).
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, long-standing 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.
On 31 August Fitch Ratings maintained Italy’s sovereign credit rating at BBB but downgraded the outlook from stable to negative. The credit agency expressed concerns over risk of fiscal loosening that could put pressure on public debt levels and a high-degree of political uncertainty as key downside risks to the outlook. Government officials, however, claim the new budget will not breach the 3% deficit threshold and details to be released shortly should ease investors’ concerns. The government is scheduled to release new public finance and economic growth projections on 27 September and submit a budget draft to the European Commission by 15 October.
Author: Lindsey Ice, Economist