Domestic Demand in Italy

Italy - Domestic Demand

Second estimate confirms stagnation in Q2

GDP growth was flat in the second quarter over the previous period in seasonally- and working-day adjusted terms, according to a second estimate released by Italy’s Statistical Institute (ISTAT) on 30 August. While this thus matched the preliminary estimate, it was down from the 0.1% uptick recorded in Q1 and highlighted broad-based frailty within Italy’s ailing economy. In year-on-year terms, GDP contracted 0.1% in Q2, down from the preliminary estimate of a flat reading but matching Q1’s print.

Consumer spending flatlined in the quarter, marginally down from Q1’s 0.1% quarter-on-quarter rise, stifled by weakening consumer confidence, rising precautionary saving and muted productivity growth. Government consumption, meanwhile, dipped 0.1% in Q2, swinging from Q1’s 0.2% uptick, as the government tried to trim spending in the face of deteriorating fiscal metrics. However, gross fixed investment increased 1.9% in the quarter, well above Q1’s 0.7% rise. The acceleration was chiefly driven by increasing investment in plants and equipment, especially means of transportation, defying the protracted weakness in the EU’s automobile sector. That said, the scope of the acceleration was somewhat limited by a drop in both residential and non-residential buildings investment.

All told, domestic demand excluding stocks contributed 0.3 percentage points to growth in Q2, a notch above Q1’s 0.2 percentage-point contribution. That said, destocking was again the elephant in the room. Stock variation detracted 0.3 percentage points from quarter-on-quarter growth, despite improving from the previous quarter’s 0.7 percentage-point subtraction. A lackluster general economic performance and a darkening outlook for domestic demand likely prompted companies to continue lightening warehouses.

The external sector, meanwhile, made a null contribution to growth in the second quarter. This was below the 0.6 percentage-point contribution recorded in Q1, reflecting a rebound of imports on the back of stronger investment. Imports of goods and services bounced back 1.1% (Q1: -1.6% quarter-on-quarter), while exports of goods and services gained some speed (Q2: +1.0% quarter-on-quarter; Q1: +0.3% qoq).

Withering domestic demand will continue to weigh on the economy this year. Muted productivity gains and slow job creation due to less flexible recruitment rules will restrain private consumption, while policy uncertainty, an unfavorable tax regime and anemic credit growth will hamper capital spending. On top of that, long-standing problems weigh on Italy’s outlook, including a mountainous debt-to-GDP ratio, a slow judicial system, high taxes and cumbersome bureaucracy. Consequently, FocusEconomics panelists project the economy to grow just 0.1% in 2019, which is unchanged from last month’s projection, and 0.5% in 2020. Downside risks stem from uncertainties surrounding the new government’s ability to deliver market-friendly policies and implement long-overdue liberalizing reforms. The resurgence of financial turbulence, coupled with the country’s sizeable fiscal deficit and fragile banking system, remains a risk in the background.