Domestic Demand in Italy

Italy - Domestic Demand

Revised estimate shows economy contracted in Q3

The Italian economy contracted for the first time in nearly four years in the third quarter, weighed down by its shrinking domestic sector. A second estimate released by the National Statistics Office (ISTAT) on 30 November showed GDP fell 0.1% in the third quarter over the previous quarter in seasonally- and working-day adjusted terms, below the flat result reported by the preliminary estimate and contrasting the mediocre 0.2% expansion recorded in the previous quarter. GDP expanded 0.7% in Q3 compared to the same quarter of the previous year, down from both the preliminary estimate of a 0.8% year-on-year expansion and the 1.2% increase logged in Q2. It was also the weakest reading since Q1 2015.

The domestic economy drove the bad quarter-on-quarter performance of the economy in Q3. Consumer spending dropped 0.1% in the quarter, down from Q2’s flat reading, restrained by cooling job creation, and muted productivity and wage growth. Meanwhile, government consumption recorded null growth in Q3, down from Q2’s 0.2% rise. Gross fixed investment contracted 1.1% in the quarter, contrasting Q2’s 2.9% rebound. The decrease was chiefly driven by a notable drop in machinery and equipment investment, and has been prompted by protracted political instability, rising interest rates, the unclear direction of government policies, declining business confidence, and financial turbulence. Meanwhile, housing investment expanded in the quarter. All told, the contribution to growth from domestic demand excluding stocks was minus 0.3 percentage points in Q3, following a positive contribution of plus 0.6 percentage point in Q2. Lastly, stock variation’s contribution to quarter-on-quarter growth was null, slightly down from the previous quarter 0.1 percentage-point contribution to growth.

The external sector supported, albeit modestly, growth in the third quarter, adding 0.1 percentage points to the overall result. It contrasted the 0.5 percentage-point negative contribution recorded in Q2. Exports of goods and services increased 1.1% (Q2: +0.6% quarter-on-quarter), while the imports of goods and services lost some steam in tandem with the weakening domestic demand (Q3: +0.8% qoq; Q2: +2.4% qoq).

FocusEconomics analysts expect the recovery to continue next year, although at a sluggish pace. Fixed investment is seen expanding, albeit at a softer rate, supported by a banking system that has only partially healed its balance sheets. Moreover, continued—although again slowing—employment growth should underpin household spending. However, long-standing problems weigh on Italy’s outlook. Most critically, Italy boasts of the second-highest public debt-to-GDP ratio in the European Union and suffers from sluggish productivity growth, a slow judicial system, high taxes and cumbersome bureaucracy. Moreover, downside risks stem from uncertainties surrounding the government’s stability and continuous clashes with the European Commission over the direction of its economic program, while a widening fiscal deficit and bulky public debt pose financial risks.

Italy GDP Forecast

FocusEconomics Consensus Forecast panelists see GDP growing 1.0% in 2019, which is unchanged from last month’s forecast. In 2020, the panel expects the economy to grow 0.9%.