Italy on the brink of recession, causes and perspectives

IMF cut Italy’s growth outlook for 2019. In an update to its WEO, IMF economists believe that the euro region’s third-biggest economy will grow 0.6 percent in 2019, down from an october assessment of 1 percent. Few days ago it was Bank of Italy which revised down its own GDP forecasts for Italy. IMF also labelled Italy as a threat and a risk for the global economy.

Next week ISTAT (Office for National Statistics for Italy) will publish the GDP data for the fourth quarter of the year that could lead to the first technical recession (two consecutive quarters of negative economic growth) over the past six years. The alarm level remains very high.

Causes of Italian crisis

The factors which penalized the growth of Italy in the second half of 2018 were, in our opinion, a combination of both exogenous and endogenous:

1) the sudden deterioration of global growth due to the commercial tensions between the United States and China have affected Italian exports, a factor that in recent years has driven Italian’s growth. In confirmation of this there is a slowdown in the other European and global economies;

2) political instability, generated first by the formation of the government and then by the budget law, lead to a significant widening of the BTp-Bund spread, as well as a slowdown in investment and consumption.

The risk of a technical recession has become very concrete in recent months. It was to be expected that in a context of global slowdown, our country could "suffer" more than other European economies. This would appear to be due to the lack of structural reforms that could make the economy more vulnerable in a context of weak global growth.

Politics and banks penalize the outlook

2019 could still be a very difficult year for the Italian economy. We believe that IMF estimates are too optimistic. In addition to the already mentioned problems of an international nature (Brexit, US-China trade war, Emerging market slowdown) there is still political uncertainty.

In confirmation of this, the BTp-Bund spread remains at high levels (250 basis points against 120 of a year ago). The risks related to the budget law remain considerable, especially in a context of low growth. Furthermore, the market continues to discount the possibility to redo political election at the end of this year. There is still a duel between deputy premier Matteo Salvini (League) and Luigi Di Maio (5Stars) over the TAV project (Turin-Lyon high-speed railway).

In this regard, a key passage could be the European elections at the end of May, where Euro-skeptic parties could gain consensus. Many political analysts forecast a government crisis after the election. If we look at the opinion polls, Salvini and the right movements could have a majority.

The banks are also a problem for Italy. The ECB's pressures for greater coverage of impaired loans could impact on capital requirements and thus open up to a new wave of capital increases. Not to mention that this could also lead to a tightening of credit, especially after the closure of the ECB taps last December. Troubles at Banca Carige and Popolare di Bari have reignited fears of wider instability in Italy’s fragile banking sector. The difficulties of the banking sector will contribute to the slowdown of the economy as Italian’s economic system is typically bank-centric.