Investment in Italy

Italy - Investment

Second estimate confirms economic contraction in Q4 2018

The Italian economy contracted for the second consecutive quarter in Q4, weighed down by weak domestic demand and by a notable destocking. A second estimate released by the National Statistics Office (ISTAT) on 5 March showed GDP fell 0.1% in the third quarter over the previous quarter in seasonally- and working-day adjusted terms, above the 0.2% contraction reported by the preliminary estimate and matching the drop recorded in the previous quarter. Annual GDP growth remained flat in Q4, however, down from both the preliminary estimate of a 0.1% year-on-year expansion and the 0.6% increase logged in Q3. It was also the weakest reading in five years. The fourth quarter’s result brings full-year growth for 2018 to 0.8%, less than half the pace at which the economy expanded in 2017.

Declining inventories drove the bad quarter-on-quarter performance of the economy in Q4. Stock variation detracted 0.4 percentage points from quarter-on-quarter growth, down from the previous quarter’s minus 0.1 percentage-point contribution to growth. A worsening general economic performance and a darkening outlook for domestic demand, namely in the industrial sector, likely prompted companies to discard some accumulated inventories. Meanwhile, consumer spending rose just 0.1% in the quarter, marginally up from Q3’s flat reading but still stifled by cooling job creation, weakening consumer confidence and muted productivity and wage growth. Government consumption also remained subdued and dropped 0.1% in Q4, matching Q3’s result. Gross fixed investment increased a timid 0.3% in the quarter, contrasting Q3’s notable 1.3% drop. The slight uptick was chiefly driven by a healthy increase in machinery and equipment investment, especially means of transport. That said, the scope of the rebound was seriously limited by protracted political instability, high interest rates, interventionist government policies, worsening business confidence, and slow credit growth. All told, the contribution to growth from domestic demand excluding stocks was plus 0.1 percentage points in Q4, contrasting a negative contribution of minus 0.2 percentage point in Q3.

The external sector continued to support, albeit modestly, growth in the fourth quarter, adding 0.2 percentage points to the overall result. It matched the positive contribution recorded in Q3. Exports of goods and services increased 1.3% (Q3: +1.0% quarter-on-quarter), and the imports of goods and services also gained some steam in tandem with the unremarkable recovery in domestic demand (Q4: +0.7% qoq; Q3: +0.4% qoq).

The economy is set to expand anemically this year owing to frail domestic demand. Slowing employment gains due to less flexible recruitment rules and muted productivity growth will restrain consumer spending, while higher interest rates, subdued credit growth and a less favorable tax regime will restrain business investment plans. Moreover, long-standing problems weigh on Italy’s outlook, 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. FocusEconomics panelists project growth of 0.4% in 2019, which is down 0.3 percentage points from last month’s projection, and 0.8% in 2020. Downside risks stem from uncertainties surrounding the government’s stability and continuous clashes with the European Commission over the direction of its economic program. The resurgence of financial turbulence, coupled with the country’s sizeable fiscal deficit and fragile banking system, also cloud the outlook.

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%.