Italy: Cyclical recovery strengthens – Rabobank

The global economy had a strong year and this didn’t go unnoticed in Italy and catalysed by an improving external environment, the Italian economy notched up a gear and economic growth accelerated to an annual rate of 1.7% in the third quarter, explains the research team at Rabobank.

Key Quotes

“Even though such a growth rate isn’t bewildering in international comparison, it’s pretty close to the fastest growth rate in Italy in the past fifteen years. The short-term outlook is quite rosy as well. Both producers and consumers are very optimistic and the manufacturing PMI is even close to a record high, signalling that the economy may continue to benefit from strong external and domestic demand. We expect the annual growth rate to rise from 1.1% in 2016 to 1.6% in 2017.”

“Looking forward, we believe growth will remain rather strong from an Italian perspective, but will slightly decelerate to 1.4% next year and 1.2% in 2019. In both these years, the main contribution to growth will stem from a cyclical recovery in domestic demand. Buoyant sentiment and employment growth underpin consumption spending and residential investment. The upward potential for household spending is however limited due to negative or muted real wage growth and the large share of hiring on temporary contracts.” 

“Business investment is likely to get a boost from positive sentiment, increasing capacity utilisation rates, improved profitability and balance sheets, strong order books and tax incentives. That said, election uncertainty might temper investment growth a bit in the first quarter. The outlook for recovery in construction and real estate remains weak and not much should be expected from construction investment.”

“Government spending won’t add much to growth either. According to current drafts, fiscal policy will become less accommodative or even contractionary, depending on which budget indicator you look at. Finally, moving to international trade, we expect both export- and import growth to moderate. The net contribution of international trade is forecast to remain around zero in 2018 and 2019. After the cyclical recovery in the next two years, we forecast growth to fall back to its potential of between 0.5% and 1.0%. Due to the country’s low growth potential, it will be very difficult for Italy to significantly bring down its debt to GDP ratio (132%) without additional structural budgetary measures or structural reforms that lift Italy’s growth potential. Yet the momentum for reforms seems to have come to an end, as we will explain later in this text.”