RaboResearch - Economic Research

Italy: economic recovery around some corner

Economic Update

  • In 2014, GDP volume shrank with 0.4%
  • In 2015, the economy is expected to finally start growing, albeit very slowly
  • Initially, the recovery is supported by consumption and foreign demand and in 2016 also by fixed investment

Slow GDP volume growth going forward

In 2014, GDP volume contracted for the third year in a row, with 0.4%; fixed investment made the only negative contribution (table 1). Looking forward, the economy is expected to grow slowly in 2015 on the back of foreign demand and private consumption. In 2016, investment growth will also contribute positively to the headline growth figure and real GDP growth slightly picks up. In terms of both economic growth and GDP volume compared to the pre-crisis peak, Italy is expected to keep lagging its eurozone peers (figure 1).

Table 1: Forecast table Italy
Table 1: Forecast table ItalySource: Macrobond, Rabobank
Figure 1: Italy lags eurozone peers
Figure 1: Italy lags eurozone peersSource: Macrobond, Rabobank

Exports: global economic recovery and weak euro

Foreign demand is supported by the weaker euro and accelerating economic growth in Italy’s main trading partners. We should bear in mind, though, that total value added from exports to non-eurozone countries amounts to only 12.5% of GDP. Moreover, Italy’s competitiveness relative to eurozone peers has worsened over the past years. Meanwhile, demand dynamics in trading partners in the eurozone continue to be rather subdued in 2015, before gaining more traction in 2016. But, we do expect net exports to contribute positively to growth over the coming two years, also since weak economic conditions at home will continue to weigh on import growth.

Private consumption: lower oil prices, but high unemployment

Consumers are not expected to notably raise spending in the coming quarters, but the sharp drop in oil prices does help. Private consumption is held back by high unemployment (12.6% in January, figure 2) and low wage growth. Yet it is supported by the strongly reduced and expectedly ongoing low inflation (figure 3), and income tax cuts introduced in 2014. Real disposable income growth in 2015 will support private consumption. A large part of the increase will likely be saved though, at least initially, as the employment outlook remains weak and fiscal policy uncertain. Besides, it will take time before the loss in income and savings suffered between 2008 and 2014 is recovered and restored.

Figure 2: Unemployment rate at new highs
Figure 2: Unemployment rate at new highsSource: Macrobond
Figure 3: Real wage growth accelerates
Figure 3: Real wage growth acceleratesSource: Macrobond

No short-term gains from removal ‘Article 18’

Recently, the Parliament agreed on a meaningful labour market reform by historical standards. It got rid of the often debated ‘Article 18’, that made it extremely hard for employers with more than fifteen employees to lay off workers. The reform will make the Italian labour market even more flexible than the German one. This is unlikely to induce faster job creation in the short term, however, since the economic outlook is still weak.

Uncertain fiscal policy

The budget 2015 is only slightly contractionary (fiscal effort is 0.25% of GDP, figure 4) and consequently is unlikely to substantially harm growth. Based on Europe’s budget rules, the European Commission initially requested a fiscal effort of 2.5% of GDP in 2015. An effort this large would deteriorate domestic demand significantly. Given Italy’s weak economic climate and a sufficiently specified reform agenda, the EC concluded at the 25th of February that the current budget is adequate for this year. That said, it is likely that the budget will be more contractionary from 2016 onwards, possibly hurting growth.

Figure 4: Fiscal policy only slightly contractionary
Figure 4: Fiscal policy only slightly contractionarySource: European Commission
Figure 5: Credit standards loosened
Figure 5: Credit standards loosenedSource: Macrobond, Banca d’Italia

Investment: slowly improving conditions

Investment growth is expected to slowly pick up in the coming quarters, after seven years of contraction. Fundamentals have improved, but not sufficiently to induce large investment growth:

i.            The capacity utilisation rate in the manufacturing sector has risen, but remains below long-term averages;
ii.            Credit standards have eased, but are still rather tight (figure 5);
iii.            Business taxes were cut, but minorly and future fiscal policy is uncertain;
iv.            The economic outlook is improving, but growth remains sluggish and uncertain, confirmed by persistently weak new orders.


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