Italy: Second estimate confirms economy swung back to contraction in Q4
March 3, 2021
A second estimate revealed that GDP dropped 1.9% in Q4 over the previous quarter in seasonally- and working-day-adjusted terms, amid tighter lockdown measures. Although the result came in slightly above the preliminary estimate of a 2.0% decrease, it strongly contrasted Q3’s 15.9% rebound, which had marked the strongest expansion since the current series began in 1995. In year-on-year terms, the economy shrank 6.6% in Q4, confirming the preliminary estimate and worsening from the third quarter’s 5.2% contraction. Taking the year as a whole, GDP plunged a record 8.9% in 2020, contrasting 2019’s slight increase of 0.3%.
Shrinking domestic and external demand were behind the contraction in the fourth quarter. Household spending fell 2.7% quarter-on-quarter, swinging from Q3’s 13.2% jump, amid tighter containment measures, an ailing labor market and downbeat consumer confidence. Additionally, fixed investment growth plunged to 0.2% in the quarter following Q3’s 29.1% surge, due to forced business closures, sour business sentiment and an uncertain economic outlook. Government consumption, meanwhile, rose 1.5% in Q4, slightly lower than Q3’s 1.6% increase.
All told, domestic demand—excluding stocks—subtracted 1.3 percentage points from growth in Q4, while stock variation added 0.3 percentage points to quarter-on-quarter growth.
Meanwhile, the external sector subtracted 1.0 percentage point from growth in Q4, after having added 4.4 percentage points in Q3, reflecting a sharp moderation in export growth. Exports of goods and services ticked up 1.3% quarter-on-quarter (Q3: +30.5% s.a. qoq) as the reintroduction of containment measures abroad weighed on foreign demand, while imports of goods and services rose 5.4% quarter-on-quarter after jumping 14.1% in Q3.
Looking ahead, 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 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 for this year, Paolo Pizzoli, senior economist at ING, called for caution:
“The rebound is likely to start from the second quarter onwards, and its pace will heavily depend on the progress on the vaccination front, which has had a slow start. Speeding up the process is clearly one of Draghi’s government priorities, and the recent changes at the top positions in charge of emergency management are a clear sign of discontinuity.”