Italy: GDP growth broadly stable, driven by restocking and consumer spending
Economic growth was broadly unchanged in the first quarter, supported by strong growth in inventories and a rebound in private consumption. However, falling fixed investment and a downturn in the external sector dragged on the result. Growth came in at 0.3% quarter-on-quarter in seasonally- and working-day terms. The reading confirmed the flash estimate and came in slightly below the 0.4% expansion recorded in the previous quarter. In Q1, GDP expanded 1.4% compared to the same quarter of the previous year (Q4 2017: +1.6% year-on-year).
Quarter-on-quarter growth in Q1 was underpinned by a surge in stocks as well as by a healthy increase in consumer spending, but it was restrained by a notable fall in fixed investment. The highly volatile component of stock variation added significantly to growth. Restocking added 0.7 percentage points to the GDP expansion as companies beefed up their warehouses, swinging from the 0.4 percentage-point subtraction from growth recorded in the previous quarter. Private consumption strengthened notably in Q1, rising 0.4% compared to a flat reading in Q4. Despite subdued wage growth, consumer spending was supported by significant employment gains and households also benefited from the effects of declining inflation.
Gross fixed investment, on the other hand, performed particularly badly. It contracted 1.4%, strongly contrasting Q4’s 1.5% growth. The bad performance of investment was broad-based, and was especially influenced by lower investment in plants, machineries and housing. Some weakness in the EU industrial sector due to adverse weather conditions and dwindling foreign demand dragged on investment activity. Moreover, the uncertain political environment likely further discouraged companies from expanding plants. Growth in government consumption, meanwhile, was flat in Q1, as in the previous quarter, a testament to the government’s attempt to keep public finances under control. Overall, the contribution to growth of domestic demand excluding stocks was flat in Q1, following a positive contribution of 0.3 percentage points in Q4.
The external sector saw significant weakness in Q1. The sector’s contribution to growth was negative, subtracting 0.4 points in Q1, a downturn from the 0.4 percentage-point contribution in Q4. Exports of goods and services were weighed on by weak overseas demand from China, Japan and the Middle East, and therefore declined 2.1% (Q4: +1.8% quarter-on-quarter). Meanwhile, imports of goods and services also dropped, restrained by weakening domestic demand, although at a softer pace than exports (Q1: -0.9% qoq; Q4: +0.5% qoq).
The newly-formed government coalition between the Five Star Movement and The League is inheriting an economy in a tentative recovery. Growth firmed up in 2017, underpinned by solid investment and export growth. However, Italy was the EU’s growth laggard in 2017, and its potential remains very low, weighed down by longstanding problems including sluggish productivity growth, a high tax burden, cumbersome bureaucracy and the second-highest public debt-to-GDP ratio in the European Union after Greece (Italy has the highest in absolute numbers). If the new government’s promises are kept, and not backed by sound spending cuts, public finances will deteriorate significantly, endangering the recovery.