Italy has once again recovered from a recession – it’s third in a decade. The strong turn in the economy was due to better than expected growth in the first quarter of this year, with a growth of 0.2 per cent GDP, and 0.1 on an annual basis, according to the national statistics bureau ISTAT. Earlier estimates had expected a quarter-on-quarter expansion of only 0.1 per cent, and 0.1 per cent year-on-year decline.
Italy was the only nation in the eurozone to enter into a recession at the end of last year, kicked off by faltering global trade and low business confidence, which resulted in two quarterly contractions. Two consecutive executive quarters of contraction is enough to qualify as a recession. However, industrial production rose in early 2019, and demand for Italian bonds rose at a 5-year debt sale. This in turn eased the pressure on the European Bank to provide a rescue stimulus package.
“The outcome reduces the chances of additional stimulus, such as generous conditions for the newest round of TLTROs, being announced by the Governing Council in June”, said euro area economists, David Powell and Maeva Cousin. The European Central Bank also said it will not be raising interest rates this year.
In addition, unemployment dropped slightly in March, to 10.2 percent, which is the lowest it’s been since 2012 according to Eurostat. Approximately 60,000 jobs were created, and the overall employment rate rose to 58.9 per cent in March – up from 58.6 per cent in February. That means employment rates are at their highest levels since April 2008.
The improvements were feted by Italy’s coalition government, which is struggling to limit both the budget deficit and state debt, while seeking to fulfill campaign promises about boosting welfare – which requires state spending – with Salvini urging what he called a “necessary tax reduction”.
While ISTAT did not give out a numerical breakdown of what’s driving the improvements, it did indicate that industry, services, and agriculture, had all shown increased activity, along with exports helping power growth. In contrast, domestic demand remained weak and had a negative impact on Italy’s economy.
“These numbers testify to the solidity and stability of the Italian economy”, Economy Minister, Giovanni Tria said.
“The Italian economy came out of recession at the start of 2019, in better shape than expected. It is likely that the current quarter may be less dynamic, but the cycle’s minimum seems to be behind us”, concurred Paolo Mameli with Intesa Sanpaolo.
However, Italy still lags behind many other countries in the eurozone, including Spain. Italy is the eurozone’s third-largest economy, and yet it is still weaker than that of the wider currency area. To compare, the eurozone economy expanded 0.4 per cent quarter on quarter, compared with a forecast 0.3 per cent expansion, according to Eurostat. This is due to investment in Spain, strong consumer spending in France, as well as Italy’s rebound – which have jointly contributed to strengthen the overall euro area. And while the region’s growth rate is still below average for the past five years, it is also the second quarterly acceleration since a previous slump in trade and factory activity, dragged the economy down last summer.
Still, Italy’s modest growth “represents a surprisingly good improvement after two consecutive negative readings”, said Nicola Nobile, a senior economist at Oxford Economics.
Nevertheless, many worry that Italy’s rebound might be short-lived. “While this out-turn is definitely decent news for the Italian economy, recent surveys, such as the Istat confidence indicators released last week, suggest that the second quarter of this year will very likely remain subdued, with Italian growth continuing to stagnate”, said Nobile.
Late in April, S&P Global Ratings also said the Italian economy will likely “stagnate this year”. Italy’s main business lobby, Confindustria, similarly said it expects the economic situation to remain fragile and uncertain during the second quarter.
That is because, even with this recent expansion, Italy’s economic output is still 5 percent below levels previously reached in 2008. Italy’s sluggish growth minimises its chances of reducing its large public debt-to-GDP ratio – and at 132 percent, Italy’s public debt is the second largest in the EU. Only Greece’s is larger, at nearly 180 percent, but Greece has larger cash buffers than Italy, as well as more rapid growth. And while France and Spain have proven economically resilient, and Italy’s growth provides optimism, external trade conflicts and domestic difficulties might yet derail the region’s growth. In particular, further upheavals in Germany’s car industry can have wide-ranging effects on the entire eurozone.
The lack of public and private investment is also a concern to Italian economists. Carlo Alberto Carnevale-Maffe, Professor at Bocconi University School of Management in Milan, told DW that “[Italian] export is robust, but it’s the only positive component of our GDP. And it isn’t able to bear the weight of the national economy on its own.”
Andrea Capussela, author of The Political Economy of Italy’s Decline, notes that Italy still lacks solid social institutions to spur innovation and deliver competitiveness. “An expansionary fiscal policy, financed through debt, kept growth up, but also hid underlying problems, like slowing growth and innovation”, he told DW.
Despite the public debt to GDP ratio, the issue is not necessarily Italy’s budget so much as how the country chooses to spend the money it does have – and not everyone is convinced that Italy is spending wisely. Capussela says, “In the short-term, the [problem is] inefficient public spending; in the long-term, Italy’s inefficient institutions – and none of this has been done [addressed]. “Carnevale-Maffe agrees, and told DW which measures are most detrimental to the quality of Italy’s public spending: “Some countries spend on public investment that increases productivity”, he says. “But with the new pension reform, which increases the pension expenditure by tens of billions of euros, Italy isn’t promoting the economy’s growth; on the contrary, it depresses growth, it reduces employment and it raises the financial burden for the new generations.”
A solid policy requires cooperation – a tall order, as the Five Star Movement and the League remain pitted against each other, in an uneasy coalition – and unable to agree on a growth plan for the country.