Italy: Second estimate confirms sharpest economic contraction in seven years in Q4 2019
March 4, 2020
In the final quarter of the year, Italy’s GDP contracted 0.3% over the previous period in seasonally- and working-day adjusted terms, according to a second estimate released by Italy’s Statistical Institute (ISTAT) on 4 March. The result marked the first quarterly contraction following one year of stagnation, as well as the sharpest drop since Q1 2013. In year-on-year terms, the economy grew a revised 0.1% in Q4 (previously reported: 0.0% year-on-year), down from the third quarter’s 0.5% increase. The fourth quarter’s result brings full-year growth for 2019 to 0.3%, more than half 2018’s 0.7% expansion and marking the softest reading since 2014.
Domestic demand, including inventories, dragged on the economy in the fourth quarter, outweighing the positive contribution from the external sector. Consumer spending contracted 0.2% quarter-on-quarter, contrasting Q3’s 0.3% quarter-on-quarter rise, hit by muted wage growth, labor market slack and a rising savings. Additionally, gross fixed investment dipped 0.1% in the quarter, following Q3’s flat reading, dragged down by policy uncertainty, downbeat business sentiment, gloomy domestic demand prospects, stifled credit growth and unfavorable external trade developments. Government consumption, meanwhile, ticked down 0.1% in Q4, matching Q3’s dip, as the government remains constrained by weak fiscal metrics.
All told, domestic demand excluding stocks subtracted 0.2 percentage points to growth in Q4, while stock variation shaved 0.7 percentage points from quarter-on-quarter growth, as companies opted to lighten their warehouses amid weaker demand prospects and subdued external demand.
In contrast, the external sector added 0.6 percentage points to growth in Q4, after subtracting 0.4 percentage points in Q3, reflecting a downturn in imports owing to the sharp destocking, faltering domestic demand and contracting industrial production. Exports of goods and services grew 0.3% quarter-on-quarter after contracting 0.3% in Q3, while imports of goods and services sunk -1.7% quarter-on-quarter after rising 1.1% in Q3.
The outlook for Italy’s economy this year is bleak amid the coronavirus outbreak, which led the government to close all schools and universities on 4 March. Fears related to the virus combined with the response to the outbreak will undercut both external and domestic demand via its impact on the tourism sector and household spending. Further clouding the outlook, the country’s burdensome public debt load, coupled with undisciplined government spending and political instability, could trigger renewed financial turbulence.
Loredana Federico, chief Italian economist for UniCredit, noted:
“The outbreak of the coronavirus in Italy in the last week of February is expected to have a significant impact on Italy’s economic growth, which had deteriorated significantly towards the end of the last year due to a recession in industry. The latest key soft indicator did not hint at an improvement in the manufacturing sector yet, and the coronavirus outbreak was not reflected in the survey”.
Moreover, Paolo Pizzoli, senior Italy economist at ING, added:
“We think economic weakness will continue in 1Q20, and Italy is likely to fall into a technical recession and think this will first show up in consumption and in export data, partially compensated by poor imports and by some emergency money. […] Given the nature of the shock, we believe the risk of a deeper recession is higher than that of a quick solution”.